This article first appeared in The Edge Financial Daily on March 27, 2019
George Kent (Malaysia) Bhd
(March 26, RM1.14)
Maintain hold with an unchanged target price (TP) of 97 sen: George Kent (Malaysia) Bhd reported its fourth quarter of financial year 2019 results with revenue of RM114.5 million — +10.6% quarter-on-quarter (q-o-q) and -33.8% year-on-year (y-o-y) — and core earnings of RM18.2 million or +0.7% q-o-q and -70.5% y-o-y. This brings FY19 core earnings to RM80.3 million, decreasing 41.9% y-o-y. The core earnings accounted for 95% of our full-year forecast and 99% of consensus forecasts — within expectations. A third interim dividend of 3.5 sen was declared.
Core profit after tax and minority interests (Patmi) remained flattish due to lower contribution from its metering segment and the light rail transit 3 (LRT3) project delivery partner (PDP) joint venture (JV), partially offset by higher contribution from its engineering segment. Y-o-y and year to date, core Patmi decreased 71% and 42% respectively due to lower contribution from its engineering — inclusive of the LRT3 PDP JV — and metering segments.
Construction costs of the LRT3 have been revised downwards to RM16.63 billion from RM22.5 billion, with a fixed price contract model. We understand the project will only return to full swing in the second half of calendar year 2019.
George Kent is targeting to grow profit contribution from its metering division to 50%, from 20%, in the short term, and to 75% in the longer term given the domestic rail construction industry’s slowdown. The company is looking for potential merger and acquisition opportunities and may also form strategic alliances to expand geographical markets and diversify its product range. For the engineering segment, near-term opportunities for George Kent would be water treatment plant jobs worth RM100 million to RM200 million, and the Klang Valley double track 2 worth RM5 billion, where we understand the company is seeking a JV partner to participate in the tender.
Our sum-of-parts valuation for George Kent is based on the net present value (weighted average capital cost: 12%) for its engineering division with nil order book replenishment; eight times price-to-earnings ratio for the metering segment assuming no y-o-y growth; and a 20% discount to its net cash per share. Our valuation is based on a bear scenario for the company, reflecting slowing mega rail job flows and an earnings sustainability issue after the LRT3’s completion, expected in FY24. — Hong Leong Investment Bank Research, March 26