GKE Corporation - CGS-CIMB Research 2021-01-14: Good Start To The Year

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GKE CORPORATION LIMITED (SGX:595)

GKE Corporation - Good Start To The Year

• GKE Corp's 1HFY21 net profit of S$6.5m (+260% y-o-y) was above expectations, at 72% of our full-year forecast.
• GKE Corp continues to ride on enhanced medical supply stockpiling in Singapore and China’s infrastructure boom.
• Reiterate ADD, with a higher SOP-based target price.

GKE Corp's 1HFY21 results above expectations

• GKE Corp (SGX:595)'s 1HFY21 (Jun 2020 to Nov 2020) net profit rose by 260% y-o-y to S$6.5m, above expectations at 72% of our full-year forecast. The strong growth is attributable to:
  1. optimal occupancy of its warehouses at higher rental rates in Singapore,
  2. higher volume of ready-mixed concrete (RMC) sold at higher average selling prices in Wuzhou, China, and
  3. payouts from government support schemes.

Strong warehousing demand due to enhanced stockpiling

• According to management, GKE Corp’s warehouse is currently fully utilised due to enhanced stockpiling by some customers, and the company is looking to further optimise its customer base to focus on higher-yield tenants. We see stable earnings visibility from the warehouse business for the next two years, given the contracts secured from key customers.
• GKE Corp has also completed a five-year lease renewal for its Pioneer Road warehouse, effective Apr 2021; we expect cost savings of S$2m annually from FY22F onwards.

Growth initiatives in China to contribute in FY22

• Heightened construction activities in China led GKE Corp to register strong earnings growth in its infrastructure materials segment in 1HFY21. GKE Corp has installed an additional line in its Wuzhou City RMC plant, raising its production capacity by 50% to cope with the increased demand for RMC.
• We also see new growth initiatives in Cenxi City, where GKE Corp set up a construction waste material recycling plant (24% stake) and a RMC plant, both scheduled to commence operations in 1QCY21. We expect the new growth initiatives to underpin earnings growth for GKE Corp in FY22F and forecast a net profit growth of 38% y-o-y to S$13.5m.

Reiterate ADD with a higher target price.

• We raise our GKE Corp's FY21-23F earnings per share forecasts by 2.7%-7.9% due to higher warehousing margin assumptions; our SOP-based target price is lifted marginally. See Fig3 in PDF report attached below for details. Reiterate ADD on GKE Corp. See GKE Corp Share Price; GKE Corp Target Price; GKE Corp Analyst Reports; GKE Corp Dividend History; GKE Corp Announcements; GKE Corp Latest News.
• Potential catalysts include further recovery in Singapore’s port container throughput and earnings-accretive M&A.
• Downside risks include a longer-than-expected path to profitability for GKE Corp’s new growth initiatives, including the waste material recycling and RMC plant in China.
• See our coverage initiation report GKE Corporation - CGS-CIMB Research 2020-01-06: Green Shoots Ahead; Initiate Coverage With ADD to know more about GKE Corp (SGX:595).

ONG Khang Chuen CFA CGS-CIMB Research | Kenneth TAN CGS-CIMB Research | https://www.cgs-cimb.com 2021-01-14

SGX Stock Analyst Report ADD MAINTAIN ADD 0.184 UP 0.180