KUALA LUMPUR (June 17): Hong Leong Investment Bank (HLIB) Research has maintained its “sell” rating on George Kent (Malaysia) Bhd at 67.5 sen with a higher target price of 52 sen (from 50 sen previously) and said the company’s prospects are capped by limited near-term orderbook replenishment potentially compounded by a thin orderbook.
In a note today, HLIB said after attending a virtual meeting with the company's management, it remains cautious on George Kent’s prospects as headwinds persisted for its construction segment.
“Despite our view of a likely resuscitation of pump priming initiatives by the government, we reckon earnings downside risks remain aplenty should job awards not materialise to arrest a quickly thinning orderbook. Suspension of its dividend payments should also amplify risks to the downside,” HLIB said.
HLIB noted that George Kent’s outstanding orderbook (excluding Light Rail Transit Line 3, LRT 3) stands at RM300 million, which translates into a cover ratio of 1.22 times of FY20 construction revenue.
It said the management has guided that construction projects could face delays in terms of completion date due to the Covid-19 outbreak and consequent movement control order (MCO).
“Construction works for its hospital projects have yet to recommence pending receipt of Covid-19 test results. Management revealed that pace of construction works may not normalise to pre-MCO levels due to SOP (standard operating procedure) guidelines (social distancing measures) in place. Prior to the shift in government, completion timeline for its hospital projects were originally slated to be extended to the first half of calendar year 2021 (1HCY21) from CY20. Given the pandemic, further extensions to the timeline look likely,” it explained.
Also, on LRT 3, HLIB reckoned the company may miss its targeted 40% completion rate by end this year due to MCO. Currently, LRT 3 completion rate stood at 24%.
Nevertheless, the research house gathered that payment for the project has been ongoing despite the MCO.
Hence, HLIB has cut its earnings forecast for the company by 6.5% for the financial year ending Jan 31, 2021 (FY21) after recalibrating progress billings to FY22, while the earnings forecast for FY22 was increased by 27% upon factoring in higher progress billings and margin normalisation.
The research house has now anticipated the company to generate a profit after tax and minority interest of RM33 million in FY21 and RM41 million for FY22. This translates to an earnings per share (EPS) of 6.5 sen for FY21 and 7.9 sen for FY22.
To recap, for the full-year FY20, George Kent's net profit more than halved to RM41.59 million from RM86.33 million a year ago, mainly due to lower contribution from its engineering and metering segments. The group's annual revenue also fell 22.2% to RM335.81 million from RM431.63 million.
To combat the setbacks faced in the construction division, HLIB said George Kent is targeting to grow profit contribution from its metering division to 50% in the short to medium term.
The company aims to roll out new products encompassing multi-jet meters (2HCY20) as well as D-Class volumetric meters (4QCY20) both geared for overseas markets.
“George Kent intends to target developing markets (Myanmar, rural Vietnam and Philippines) with its cheaper multi-jet offering while its D-Class volumetric meters are meant for more affluent countries (Singapore, Hong Kong, Australia, Europe),” HLIB said.
Currently, the metering division's utilisation rate stood at 60% since it resumed operations in mid-April, but it is still lower compared to the 70% to 75% utilisation rate it has achieved pre-MCO period.
HLIB has raised its target price to 52 sen from 50 sen previously, after switching its valuation methodology from sum-of-part (SOP) to price-earnings (PE) due to its shrinking earnings base in both segments. It added that target price is derived from pegging FY22 EPS to 6.6 times PE multiple (-1 standard deviation [SD] below three-year mean).
At 10am, George Kent traded unchanged at 67.5 sen, with 162,100 shares exchanging hands. The stock has recovered 41% from its recent low of 48 sen on March 19.