GKENT - Really A Gem??

When i wrote this, i expect i will be again cursed by many. But, please, my intention is good. So please pardon me. Furthermore, i'm also not very sure if my guestimate is correct of not.

Now, let begin.

Gkent has released latest set of result. A "FANTASTIC RESULT" indeed. But, i' cautioned. I will provide my reason below.

Brief History:

Gkent is another Old Giant, just like Thong Guan and Tien Wah, founded since 1936. It has 2 main division: the water meter and the engineering segment. The engineering division has been the main contributor to company's bottom line, thanks to LRT extension work awarded to Gkent in year 2012.

Some Major Contracts Awarded:

Date	Project	Amount (RM)
July 2012	LRT extension work - 44 months (completed)	955.8 mil + 128.6 mil
Oct 2014	Hospital Kuala Lipis - by April 2017	57 mil
Sept 2015	LRT 3 (PDP) - 2016 to 2020	4,500 mil
Sept 2015	Hong Kong Water Meter - 2015 - ??	31.9 mil

Based on above, i try to add the total engineering work (prior to LRT 3 and exclude water meter) which stood at approximately 1,141.4 mil.

Then,

I try to tabulate past 4 years of annual report. Reason is i want to see whether LRT extension work which worth at 955.8 mil + 128.6 (optional) has finished its contribution or not.

		Infra/ engineering (RM)	Metering (RM)	Total	Infra %	Meter %
Jan 2013	Revenue	149.6 mil	127.2 mil
	Segment Profit	28.5 mil	15.0 mil	43.5 mil	65.5%	34.5%
Jan 2014	Revenue	390.7 mil	115.6 mil
	Segment Profit	44.8 mil	18.0 mil	62.8 mil	71.3%	28.7%
Jan 2015	Revenue	256.5 mil	96.7 mil
	Segment Profit	32.5 mil	19.2 mil	51.7 mil	62.9%	37.1%
Jan 2016	Revenue	432 mil	105.4 mil
	Segment Profit	60.8 mil	23.6 mil	84.4 mil	72%	28%
	TOTAL REVENUE	1,228.8 mil

(1) Based on above table, i guess the LRT extension work awarded in July 2012 for 44 months (which is approximately 3 1/2 years) may have ended in Jan 2016.

(2) If my guestimate is correct, the latest Q4 FY2016 annoucement has concluded the last part of Revenue & Earning for 2012 LRT extension work. In another word, the contribution of LRT extension work may have come to the end. 

(3) From the past 4 years Metering Result, it growth steadily from 15 mil to 23.6 mil annualy. Based on latest Jan 2016 segment profit ratio, water meter has contributed 28% and engineering has contributed 72%. I think is fair for me to use the same 28% & 72% to translate the NET Profit Contribution both segment from full year of about RM 50.3 million. 

So, 

Engineering Segment = 50.3 x 72% = 36.2 mil / 300,410,000 shares = 12.05 sen EPS annually

Water Segment = 50.3 x 28% = 14.08 mi / 300,410,000 shares = 4.68 sen EPS annually 

Since the contribution for LRT extension work has ended, the 12.05 sen should be excluded from future estimation of EPS.

Now,

Let add in LRT 3 project which will contribute from 2016 - 2020 for approximately 5 years. Hospital kuala lipis contract will end in one year time, therefore, i take it out from calculation.

For Gkent engineering segment,

i roughly put the order book at RM 4,500 mil for 5 years.

For easy calculation, i used 6% as net margin (which in actual i believe is lower eventhough Gkent act as project delivery partner)

Annnual Sales = 4,500 mil / 5 years = RM 900 mil

Annual Profit 900 mil x 6% = RM 54.0 mil 

Annual EPS 54.3 mil/ 300,410.000 = 18.1 sen EPS per year 

For Gkent meter segment, it gives 4.68 sen EPS per year

Total EPS per year = 22.8 sen 

If PE is 10, the share price is worth RM 2.28 per share. 

At current share price of RM 1.80, there maybe some room of profit if based on latest financial result.

However, IF MY GUESTIMATE IS CORRECT, the room for share price appreciation maybe limited for Gkent when future EPS can only be achieved at 22.8 sen per year.

To add salt onto the wound, for large scale long term infra project, lesser profit during the early part of the project, and more profit recognised towards the end of 5 years contract (i suspect this is the reason why the 22% operating margin is recorded in Q4 2016), the EPS of 22.8 sen may be achieveable only from 2018 onwards? Maybe..I am not very sure either.

Anyway, above are just my speculative guestimate. I may be right, may be wrong. 

Furthermore, Gkent may acquire more projects in the future. So, please treat this article for reading pleasure only. It is definately not a buy/ sell recommendation.

cheers,

YiStock

29th March 2016