HLIB maintains ‘Buy’ call on George Kent after 2Q performance

by SULHI KHALID/ pic by TMR FILE

GEORGE Kent (M) Bhd’s recent second quarter (2Q) result came in below expectations due to lower contribution recorded from its Light Rail Transit Line 3 (LRT3) project delivery partner (PDP) as the project will be resumed in the last quarter of the year (4Q19), said Hong Leong Investment Bank (HLIB).

The research house has maintained its “Buy” call on the company with a target price of RM1.41 after earnings estimate adjustment.

“We opine that the key uncertainty for George Kent has been removed following the renegotiation and restructuring of LRT3 PDP contract.

“The group’s balance sheet is very healthy with net cash of RM0.37 per share, amounting to 36% of current market capitalisation,” it said in a research note yesterday.

HLIB added that the construction company is targeting to grow profit contribution from its metering division to 50% from 20% previously in the short-term and 75% in the longer-term given the slowdown in the domestic rail construction industry.

The company is looking for potential merger and acquisition opportunities and also may form strategic alliances to expand geographical markets and diversify products range HLIB added.

Separately, George Kent’s net profit fell 55% year-on-year (YoY) to RM11 million in the 2Q ended July 31 this year, against RM24.5 million recorded in the previous corresponding quarter due to lower profit contributed by its engineering segment.

The construction company told Bursa Malaysia on Tuesday that its revenue for the quarter dropped 13% to RM97.7 million, from RM112 million registered in 2Q19 on the back of lower revenue contributed by its metering segment.

Commenting on the group 2Q’s financial performance, George Kent chairman Tan Sri Tan Kay Hock (picture) said the results reflect the robustness of its group’s businesses despite lower profit and turnover reported between April to July this year.

“The long-term licence agreement with Honeywell International Inc, signed in June 2019, enables the group to have control of the manufacture of the complete meter to meet the increasing domestic and global demand and reduce production costs.

“This agreement will also provide the group with 15 additional territories to sell our water meters,” he said in a media statement on Tuesday.

The group’s engineering revenue declined 14% YoY to RM68 million, compared to RM80 million previously due to lower profit recorded in its construction division.

Construction accounts for 95% of the revenue and 96% of segment profit of the engineering division.

Its metering segment’s revenue fell 13% YoY to RM28 million, contributed by lower sales and gross profit margin in the current quarter.

Moving forward, the group expects its smart metering solutions, which currently undergoing proof of concept and pilot testing in various states, to drive its earnings in the future.

“These initiatives are positive steps taken to expand the metering business contribution to 50% or more of the group’s earnings, in line with the group’s long-stated strategic plan to broaden its income base,” stated Tan.

George Kent will also seek opportunities in the regional railway space, leveraging on its expertise as rail systems integrator in domestic railway projects and its established network with global rail specialists.

“Similarly, with the successful completion of over 30 water infrastructure projects in the last 26 years, the group is well-positioned to explore opportunities arising from the government’s drive to resolve the country’s non- revenue water issue,” he added.

The group declared an interim dividend of 1.5 sen, to be paid on Oct 31, 2019.

George Kent share price closed one sen lower at RM1.03 yesterday, valuing the company at about RM555 million.

George Kent is an engineering company involved in manufacturing, trading and investment development of water infrastructure projects and provision of construction services.

The group exports its products to Singapore, Thailand, Vietnam, Myanmar, Cambodia and the UK.