CGS-CIMB Research analysts Kenneth Tan and Ong Kang Chuen have maintained their “hold” rating on GKE Corp, but have trimmed their target price from 10 cents to 9.4 cents.
In its results for the 1HFY2023 ended Nov 30, 2022, GKE’s net profit stood at $1 million, down by 74% y-o-y but up by 12% h-o-h. The plunge in net profit was due to the $2 million of credit loss provisions for GKE’s ready mix concrete (RMC) business and stood below the analysts’ expectations at 14% of their FY2023 estimates.
In their Jan 17 report, Tan and Ong note that GKE’s 1HFY2023 revenue for its warehouse segment remained healthy although its RMC business operations were “weak”. Overall revenue for the period stood flat y-o-y with stronger warehousing and offset by weak infrastructure figures.
GKE reported revenue of $54.7 million for 1HFY2023, just 0.5% lower y-o-y. On a segmental basis, its warehousing segment saw a 19.8% increase in revenue from $36.12 million in 1HFY2022 to $43.29 million in 1HFY2023. This was largely driven by the financial contribution from speciality chemicals subsidiary Fair Chem, which it acquired in January 2022, as well as an increased capacity for Dangerous Goods (DG) storage at newly converted yards.
“The conversion of space into DG storage enhanced rental yields, helping the segment’s profit before tax (PBT) margin to expand 1.1% percentage points y-o-y to 13.3% in 1HFY2023,” the analysts write.
GKE’s warehouse business continued to see positive warehouse rental reversions of 5% y-o-y, and the analysts add that the group’s warehouses remain at close to full occupancy, with tenant mix optimisation ongoing.
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Moving forward, GKE plans to carry out more asset enhancements to grow its DG storage capacity, and in view of the higher-margin DG mix, the analysts raise their FY2023 to FY2025 segment PBT forecast by 20-21%.
On the other hand, the RMC business suffered a 40.4% drop in revenue, falling from $18.77 million in 1HFY2022 to $11.19 million in 1HFY2023.
Elaborating, the analysts say that the RMC operations in China were adversely impacted by China’s housing market slump and tight pandemic measures imposed.
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Ong and Tan write: “while we think the worst is over operationally given the recent easing of pandemic measures in China and easing of “three red lines” policy for the property sector, we expect construction activities to only recover more meaningfully in FY2024.”
The analysts still see risks on higher credit loss allowances in 2HFY2023, noting that PBT for the RMC segment in 1HFY2023 is in a loss position. They expect the segment PBT to break even in 2HFY2023, while their FY2024 to FY2025 segment PBT forecast is cut by 37-47%.
Overall, GKE’s operating profit margin (OPM) declined 3.1% percentage points y-o-y, on the back of operational deleverage from weaker volumes in China RMC business and credit loss allowances.
Similar to 1HFY2022, no interim dividends were proposed.
“While we believe the worst is likely over for GKE, we remain cautious near-term on the pace of recovery in its China RMC operations, given the higher credit risk environment,” Ong and Tan say.
Some re-rating catalysts they see include a faster-than-expected recovery in China’s construction sector, while downside risks include higher credit losses and prolonged turmoil in China’s property market.
As at 11.51am, shares in GKE traded at 8.7 cents, with a FY2023 P/B ratio of 0.73x and dividend yield of 3.12%