GKE Corporation - CGS-CIMB Research 2021-08-03: Doubling Down In China

GKE CORPORATION LIMITED (SGX:595)

GKE Corporation - Doubling Down In China

GKE announced record profit of S$11.5m (+146% y-o-y) for FY21, riding on optimal warehouse occupancy in SG and elevated ready-mix concreate (RMC) demand in China.
GKE Corporation is counting on China as its next leg of growth; RMC capacity is set to double in CY22F. New initiatives there to contribute positively by 2HFY22F.
Near term growth in Singapore to be capped by capacity constraints. GKE Corporation is on the lookout for M&A opportunities. We reiterate our ADD call with a target price of S$0.21.

FY21 was a record year for GKE Corporation (SGX:595), with net profit of S$11.5m (+145% y-o-y). Stripping out one-off items, core net profit of S$10.3m (+120% y-o-y) was below at 91% of our FY21F forecasted S$11.3m, due to higher-than-expected increase in admin expenses. Dividend payout was reinstated for the first time since FY16, dividend of S$0.004 (28% dividend payout ratio) was higher than our projected S$0.0028 and implies some 2.8% dividend yield.

We forecast China operations to see 60% PBT growth in FY22F to S$15.6m. GKE Corporation’s ready-mix concrete (RMC) capacity will be effectively doubled to 1.6m m³ per annum by end-1H22F, with the production line added in Wuzhou city, Guangxi (1QCY21) and commencement of production in Cenxi city, Guangxi (3QCY21). We believe this will allow GKE Corporation to better tap on the continued robust demand for construction materials there, as fixed asset investments in Wuzhou grew 25% y-o-y year-to-date.
GKE Corporation's management also expects new initiatives (construction waste material recycling plant and limestone mining) to contribute positively from 2HFY22F onwards.

Warehouse utilisation remains optimal due to stockpiling by customers, and rental rates trended higher thanks to further optimisation of GKE Corporation’s tenant mix. GKE Corporation obtained Good Distribution Practices (GDP) certification for two of its warehouses, which allows for storage of pharmaceutical products – we believe this could enhance its chances of renewing government’s strategic stockpile contract by year end. GKE Corporation remains on the lookout for additional space.
Looking into FY22F, we think that GKE Corporation's Singapore operations could see PBT rise to S$7.3m (+7% y-o-y). We believe that cost savings from lease renewal (effective Apr 21) and acquisition of remaining 30% stake in Marquis Services (FY21: ~S$2m net profit) could more than offset decline in government grants.

Reiterate ADD. We lower our FY22F-23F earnings per share forecast by 1.5-4.5% to account for the commencement delay of Cenxi plant. Our SOP-based target price for GKE Corporation is kept at S$0.21, implying 10.3x CY22F P/E.
See
Potential re-rating 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 Corporation’s new growth initiatives.

ONG Khang Chuen CFA CGS-CIMB Research | Kenneth TAN CGS-CIMB Research | https://www.cgs-cimb.com 2021-08-03

SGX Stock Analyst Report ADD MAINTAIN ADD 0.210 SAME 0.210