This article first appeared in The Edge Financial Daily on December 20, 2019
George Kent (Malaysia) Bhd
(Dec 19, 94 sen)
Downgrade to market perform with a lower target price of 97 sen: For the nine months ended Oct 31, 2019 (9MFY20), George Kent (Malaysia) Bhd’s core net profit (CNP) of RM33.4 million or -46% year-on-year accounted for just 56% and 58% of our and consensus full-year forecasts respectively. The weaker results were mainly dragged by the engineering division. A dividend per share of one sen was declared, taking year to date to 2.5 sen.
For 9MFY20, its CNP plunged to RM33.4 million as revenue dropped 20% to RM253.4 million, dragged mainly by the engineering division following its pre-tax profit down 44% and revenue declining 27%. The metering segment also contributed less with a pre-tax profit down 33% and revenue easing 5%. The engineering segment and the metering operation saw lower pre-tax margins of 26.4% from 34.4% and 16.4% versus 23.2% respectively.
Quarter-on-quarter, George Kent’s CNP for the third quarter (3Q) of FY20 fell 26% mainly attributable to a weaker engineering contribution with a pre-tax profit of RM8.9 million (-48%), partly mitigated by better metering pre-tax earnings of RM6 million (+38%).
The slow progress to resume construction works for the RM11.4 billion Light Rail Transit 3 project — in which George Kent has a 50% interest — could be taking a toll on the group’s performance. Since a renegotiation with the government to change the project’s structure from a project delivery partner model to a “fixed price contract” in January 2019, there have been little developments on the review’s outcome concerning work package contractors for previously awarded contracts, as works were initially targeted to resume in 4Q of calendar year 2019.
Meanwhile, the group is taking initiatives to grow its metering business with a long-term licence agreement with Honeywell signed in June this year to manufacture high-precision water meter measuring components with exclusive rights to sell these water meters to 26 territories.
Following the results, we slashed our financial year ending Jan 31, 2020 (FY20) and FY21 earnings by 25% and 36% after factoring in a lower revenue recognition and slimmer margins. Risks to our call are lower-than-expected margins and a delay in construction works. — Kenanga Research, Dec 19