CGS-CIMB lowers GKE Corp’s TP on weaker China operations

CGS-CIMB analysts have maintained their “add” rating on GKE Corp with a lowered target price of 16 cents from 21 cents previously

CGS-CIMB analysts Ong Khang Chuen and Kenneth Tan have maintained their “add” rating on GKE Corp with a lowered target price of 16 cents from 21 cents previously.

According to Ong and Tan, GKE’s net profit of $3.8 million for the 1HFY2022 ended Nov 30, 2021. The figure, which was a 41.5% y-o-y decline, stood below the analysts’ expectations at 27% of their FY2022 forecast.

“Excluding effects of government grants, GKE’s 1H net profit declined 12% y-o-y,” say the analysts in a Jan 18 report, who attributed the miss to weaker-than-expected operations in China.

GKE Corp’s China operations were hurt by lower ready-mix concrete (RMC) volumes, delayed commercialisation of its Cenxi plant, and a credit loss provision of $0.9 million, note the analysts.

Meanwhile, GKE’s operations have remained strong in Singapore, as warehouse utilisation remains optimal and demand for transportation services strong, they add.

During the 1HFY2022, GKE’s logistics segment saw its revenue and profit before tax (PBT) grow some 16%/19% y-o-y, which were driven by continued tenant mix optimisation and positive rental reversions. “GKE’s warehouses remain fully utilised, and management is currently converting some open yard space into chemical storage areas to further optimise yield,” say Ong and Tan.

Yet, analysts continue to be more cautious on the infrastructural materials segment in China and now forecast segment PBT to decline 45% y-o-y in FY2022, as it is believed that the near-term tight liquidity environment will impact the construction industry’s supply chain.

“GKE also mentioned it is carefully monitoring the situation and has taken active steps to minimise credit risk exposure,” says the analysts. “GKE’s other initiatives in China are starting to contribute positively in 2HFY2022, including its waste material recycling plant– commenced operations in 2021 and contributed $0.1 million in share of associate profits in 1HFY2022; likely to further ramp up in 2HFY2022 and limestone mining rights.”

Some downside risks posited by the analysts include higher-than-expected credit losses and potential re-rating catalysts include faster recovery in China’s construction activity as well.

To this end, the analysts have lowered their earnings per share (EPS) estimates for the FY2022 to FY2024 by 16% to 41% “to reflect lower revenue and margin assumptionson the China infrastructure materials segment”.

“Nevertheless, we remain optimistic of GKE’s longer term prospects in China, given its continued urbanisation plans in lower tier cities. Reiterate ‘add’, with a lower sum of the parts (SOTP)-based target price of S$0.16, implying 11.7 times calendar year (CY)2022 price-to-earnings ratio (P/E).”

At 4:02pm, shares in GKE are trading 0.3 cents lower or 2.59% down at 11 cents.

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