GKE Corporation - CGS-CIMB Research 2021-01-06: Green Shoots Ahead; Initiate Coverage With ADD

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GKE CORPORATION LIMITED (SGX:595)

GKE Corporation - Green Shoots Ahead

• We forecast 93% NPAT growth in FY21 (June 2020 to May 2021) for GKE Corp, riding on Singapore’s enhanced medical supply stockpiling and China’s infrastructure boom.
• Favourable dynamics in Singapore’s warehousing industry and GKE Corp’s growth initiatives in China may underpin net profit CAGR of 49% over FY20-23F.
• We initiate coverage on GKE Corp with an ADD rating.

GKE Corporation - Company Background

• Established in 1995, GKE Corporation (SGX:595) is an integrated warehousing and logistics solutions provider offering one-stop, end-to-end multi-modal supply chain management solutions and services.
• The business activities of the group are classified into two broad categories:
  1. warehousing & logistics, and
  2. infrastructural materials & services.

Warehousing and logistics

• Under the warehousing and logistics division, GKE Corp offers integrated and comprehensive warehousing & logistics solutions and services that include general cargo storage, dangerous cargo storage (Classes 2, 3, 4, 5.1, 6.1, 8 and 9), bonded and licensed warehousing services, conventional transportation, container trucking, project logistics, international multi-modal sea and air freight forwarding services, marine logistics, and chemical warehousing. In addition, GKE Corp has established its support services at the ports to further enhance its clients’ logistics value chain. The services are offered through GKE Corp’s various subsidiaries below:
  • GKE Warehousing & Logistics (100% stake) provides end-to-end logistics solutions and services to its customers spanning from consumer products, manufacturing, electronics, and retail industries. Services comprise receiving cargoes at destinations, providing storage and inventory management at the GKE group warehouses, and arranging for delivery to designated recipients in Singapore and around the world. In Singapore, GKE Corp operates four warehouses –
    • No. 6 Pioneer Walk,
    • No. 39 Benoi Road,
    • No. 30 Pioneer Road (Leased from ESR-REIT (SGX:J91U)),
    • 7 Kwong Min Road.
  • Marquis Services Pte Ltd (70% stake) was acquired by GKE Corp in Dec 2015. It is a specialty chemicals storage and management specialist, capable of handling and storing dangerous goods such as chemical products and flammable materials. It is also involved in industrial coating blending services and marine support services.
  • GKE Express Logistics Pte Ltd (100% stake) and GKE Freight Pte Ltd (100% stake) provides cargo transportation and freight forwarding services. Its cargo transportation capabilities include conventional cargo, heavy haulage, and out-of-gauge transportation. For freight services, the group offers international multi-modal freight forwarding services via sea, air and land. GKE Corp maintains its own fleet of transportation vehicles including prime movers and trailers. As at end-Dec 2020, the group has a fleet of 38 prime movers in Singapore.
  • GKE Services Pte Ltd (100% stake) predominantly focuses on providing manpower solutions and stevedoring services for the Port of Singapore Authority (PSA). GKE Corp is one of the main contractors for PSA, handling port operations at Pasir Panjang Container Terminals and the Pasir Panjang Automobile Terminal. In addition to port management services, GKE Services also provides operational and labour support for SATS (SGX:S58)'s Inflight Catering Centre, specifically the Warewash operations for national carrier Singapore Airlines.

Infrastructural materials & services

• GKE Corp’s infrastructural materials and services business is concentrated in the People’s Republic of China. Currently, the main asset under this segment is wholly-owned subsidiary Wuzhou Xing Jian Readymix Co Ltd (Wuzhou Xing Jian), which is primarily engaged in the manufacturing and supplying of ready-mix concrete products to the infrastructural and construction sector in Wuzhou City since Jun 2016. Wuzhou Xing Jian owns an automated cement mixing plant in Wuzhou, China, which has a total annual production capacity of 1.2m cubic metres as of end-FY20.
• GKE Corp is expanding its automated ready-mix concrete manufacturing business into Cenxi City, China (scheduled to start production in 1QCY21, according to the company). GKE Corp is also extending its operations to
  • construction material waste recycling in Cenxi City through Cenxi Haoyi Recycling Co Ltd (24% stake); and
  • mining and production of limestone products in Cangwu County (Wuzhou Xing Jian holds the mining rights of a limestone mine, allowing the company to mine and produce up to 500,000 tonnes of limestone p.a.).

GKE Corporation - Investment Merits

Spike in warehousing demand due to enhanced stockpiling

• Based on our channel checks, demand for warehousing spaces in Singapore strengthened significantly in 2H20 due to enhanced medical supply stockpiling. This finding is supported by statistics from JTC Corp, which showed that the average occupancy of warehouse spaces in Singapore had rebounded to 89.1% in 3QCY20, a level last seen 1QCY19.
• According to management, GKE Corp’s warehouses are currently running at maximum capacity, and GKE Corp is looking to optimise its customer base to focus on higher-yield tenants. Given the high operating leverage nature of warehousing, we expect the stronger warehouse demand to result in robust margin expansion in FY21F.
• Despite the short-term disruption on logistics business from COVID-19, we forecast GKE Corp’s warehousing and logistics business to achieve 69.7% y-o-y segment PBT growth in FY21F.
• Muted incoming industry supply for warehouse space over the next two years could also support higher rental yield, in our view. According to JTC, average incoming supply of warehouse space should average at 236,000 square feet annually from 2021F to 2023F, which is notably lower than the actual supply figures observed from 2015 to 2019.

Expected cost savings from 30 Pioneer Road lease renewal

• We also see scope for rental reduction for GKE Corp’s 30 Pioneer Road warehouse. GKE Corp is currently paying above-market rates for the lease of this warehouse as part of the sale & leaseback condition set in place back in 2016.
• In Oct 2020, GKE Corp announced the renewal of its 30 Pioneer Road lease, for a period of five years commencing on 15 Apr 2021.
• We estimate GKE Corp can reap rental savings of S$2.5m p.a. from FY22F onwards.

Improving trade flows to help logistics business recovery

• Global business sentiment is steadily improving as countries around the world prepare for COVID-19 vaccine rollouts. We believe GKE Corp’s logistics operations will
  • stand to benefit from a rebound in trade activity, given its main business activities
  • of transportation & freight, marine logistics, and port operations.
• A good proxy to track the recovery of GKE Corp’s logistics business will be Singapore ports’ monthly container throughput. In our view, a strong cargo throughput would positively impact the group’s topline via elevated demand for its prime move, ship repainting, and container logistics services.
• According to Nov 2020 figures by the Maritime and Port Authority of Singapore, container throughput in Singapore has recovered strongly from its low of 2.81 million twenty-foot equivalent units (TEUs) in May 2020 to 3.14 million TEUs in Nov 2020. Despite recording a 4.1% y-o-y decline, Nov container throughput still remained higher than the 2019 average of 3.10m TEUs, indicating a promising recovery to pre-COVID-19 levels. For 2021F, we remain optimistic of stronger trade volumes in Singapore driven by rebounding economies and growing business confidence.

Beneficiary of China’s infrastructure boom

• Since Apr 2020, China has been aggressively ramping up its construction and infrastructure development activities. Total floor space under construction in Guangxi, the autonomous region which Wuzhou belongs to, has been on a steady uptrend since the start of 2020, rising from 239m sq m in Feb to 312m sq m in Nov.
• Similarly, fixed asset investments have strongly rebounded from the low in Feb, recording 13.5% y-o-y growth in Oct, based on figures from the Wuzhou Municipal Bureau of Statistics.
• We expect heightened construction activities to translate to stronger RMC demand, and forecast GKE Corp’s infrastructure materials segment to record 64% growth in segment profit in FY21F.

Investments in China to drive medium-term growth

• GKE Corp is expanding its presence into Cenxi City by setting up a construction waste material recycling plant (24% stake as of end-FY20) and an RMC plant, both of which are scheduled to commence operations in 1QCY21 according to management. The plants will be located in close proximity to each other.
• According to management, recycled waste produced by the recycling plant could be used as feedstock for the production of ready-mix concrete; we expect synergistic benefits to be realised as the concrete business will have access to low-cost raw materials, allowing the group to enjoy cost savings. We expect both plants to commence operations in 1QCY21 and collectively contribute S$2m/S$12m to GKE Corp’s revenue in FY21/22F.
• Aside from the Cenxi facilities, GKE Corp also owns a mining license for a limestone mine in Cangwu County. It monetised the license by forming a joint venture with two external parties and owning 18% stake in the JV in May 2019. From GKE Corp's announcement in May 2019, the group is entitled to receive RMB3 per tonne of output produced and sold by the JV, with a 15% price escalation every three years. Limestone has a wide range of uses such as in road construction and as a chemical feedstock.
• We expect the new initiatives to underpin GKE Corp’s net profit CAGR of 48.8% over FY20-23F.

GKE Corporation - Financial highlights & Recommendation

• We forecast 15.3% revenue CAGR in FY20-23F, with strong margin expansion ahead. See PDF report for detailed analysis on GKE Corp's financial. In terms of balance sheet – GKE Corp's net gearing is on a declining trend. Dividend payout a possibility from FY21F onwards. See GKE Corp's dividend history.
• We initiate coverage on GKE Corp with an ADD rating based on a SOP valuation. The main rational for a sum-of-parts valuation is due to GKE Corp operating two distinct businesses across 2 geographies. Details for our valuation of the individual parts are available in PDF report attached below.
• See
  • GKE Corp Share Price;
  • GKE Corp Target Price;
• Our target price implies CY21F P/BV of 1.44x, or 0.6 s.d. above GKE Corp’s historical average P/BV. We believe this is well supported, based on our estimates that GKE Corp can achieve an average ROE of 12.5% over FY21-23F.

See the PDF report attached below for complete analysis on GKE Corporation (SGX:595).

ONG Khang Chuen CFA CGS-CIMB Research | Kenneth TAN CGS-CIMB Research | https://www.cgs-cimb.com 2021-01-06

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