CGS-CIMB keeps 'hold' on GKE Corp despite earnings beat

The brokerage has increased its target price to 7.6 cents from 7 cents previously.

CGS-CIMB Research has maintained its “hold” call on GKE Corporation 595 as the group’s strong Singapore operations were offset by weak business in China.

In their report dated July 28, analysts Kenneth Tan and Ong Khang Chuen note that GKE’s net profit of $2.9 million for 2HFY2023 ended May 31, a 227% increase y-o-y, came in above their expectations, with the company’s FY2023 net profit of $3.9 million forming 159% of their full-year forecast, despite being a 17% y-o-y decrease.

According to them, this overperformance was due to stronger-than-expected margin expansion for its Singapore operations, offsetting the slight decline in China.

For the half-year period ended May, GKE’s warehousing and logistics revenue grew by 12% y-o-y to $43 million, driven by positive warehouse rental reversions, stronger contribution from dangerous goods storage, and 6 months of contribution from the acquired specialty chemicals subsidiary Fair Chem Industries.

On account of a higher-margin service mix, the segment’s profit before tax (PBT) margin rose by 2 percentage points y-o-y to 12.1% in 2HFY2023. Tan and Ong are forecasting the segment’s PBT to grow 16% y-o-y to $12.7 million in FY2024 on a further expansion of dangerous goods storage capacity and rental reversions of some 3%.

While the analysts believe that GKE’s FY2024 outlook for Singapore remains positive, they note that China’s recovery remains uncertain.

GKE’s 2HFY2023 revenue in China remained weak at $11 million, a 3% y-o-y dip, as construction activities stayed sluggish through 2HFY2023, negatively impacting ready-mix concrete sales volumes.

More positively for the company, GKE’s credit loss allowances fell 87% h-o-h to $0.3 million as it remained cautious on granting credit terms.

“With China’s Politburo pledging policy adjustments for the property sector, we think GKE could benefit from volume recovery in FY2024, although we believe the path to recovery will remain bumpy,” say the analysts, who add that GKE’s investments in the recycling plant JV and mining rights in China started to contribute positively in 2HFY2023.

Though the analysts see an “uncertain pace of recovery” for the group, the analysts have upped their FY2024 earnings per share (EPS) estimate by 3.5% on higher margin assumptions, thereby lifting their sum-of-the-parts (SOTP) target price to 7.6 cents from 7 cents previously.

Their upside risks include a quicker-than-expected recovery in Chinese construction activities and stronger margin expansion from the contribution of dangerous goods storage, while downside risks include “prolonged turmoil” in China’s property market and higher credit losses.

As at 12.57pm, shares in GKE were trading flat at 7.2 cents.

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