GKE Corporation - SAC Capital 2021-08-05: Building Up Balance Sheet, Brick By Brick


GKE Corporation - Building Up Balance Sheet, Brick By Brick

  • Good FY21, expect to continue into FY22.
  • Total capacity for ready-mix concrete (RMC) plants sitting at 1.6 million m3.
  • Maintain BUY rating on GKE Corp at higher target price.

Good FY21, expect to continue into FY22

  • GKE Corporation (SGX:595)'s FY21 revenue and profit were 1.9%/2.7% below our estimates, with lower-than-expected revenue due to reduction in sales from aviation sector customers, and higher-than-expected allowance for expected credit loss posted, increasing administrative expenses.
  • GKE Corp's revenue saw a 10.9% increase y-o-y from S$107.3m to S$119.0 million in FY21 ended 31 May, with the higher revenue supported by
    1. higher utilisation of warehouse space at better rental rates;
    2. increase in trucking volume, and
    3. higher revenue from ready-mix concrete plant.
  • Gross margin increased from 20.4% in FY20 to 24.1% in FY21 as a result, lifted also by Singapore government support schemes and higher contribution by infrastructural segment (44.4% in FY21 vs 34.4% in FY20) which generally has higher margins comparatively.
  • GKE Corp also recorded higher other income, largely due to government grants, and one-off S$2.5m gain on disposal of 65% stake in Van Der Horst Logistics and its subsidiary, and G-Chem Logistics. Half the consideration had been received in FY21, with the other half expected in FY22.
  • Share of loss from associates increased to S$0.09m with start-up costs of Cenxi Haoyi Recycling in China. As it turns operational, we expect slight gain in FY22 and FY23.
  • GKE Corp's overall FY21 PATMI surged by 2.5x from S$4.7m to S$11.5m.
  • After 5 years, GKE Corp’s turnaround saw a S$0.004 dividend declared, or 26.8% of FY21 net profit. We expect dividend payout could continue with strong results anticipated.

Steady increase in profit before tax margin

  • Third party logistics (warehousing) segment is likely to continue to benefit from Covid stockpiling and improved utilization and rental rates in FY22.
  • Infrastructural segment is the historically higher profit margin segment, clocking 17.9% in FY21, though this was a drop from 19.6% due to higher expenses incurred on the new Wuzhou Xing Jian plant.

Total capacity for ready-mix concrete (RMC) plants sitting at 1.6 million m3

  • In FY21, Wuzhou Xing Jian RMC plant added one of the building blocks for construction.

Stronger balance sheet; acquisition of non-controlling interest

  • GKE Corp acquired the remaining 30% stake in Marquis services, a specialty chemicals storage and management specialist that handles chemical products and flammable materials. GKE Corp paid S$2.7m for the acquisition and will now see full contribution of net profit from 1 May 2021. Net tangible assets of Marquis was S$5.5m.
  • With strong FY21, GKE Corp's retained earnings position currently sits at S$4.5m, a turnaround from accumulated losses of S$6.3m a year ago.
  • Net gearing ratio decreased from 0.51x to 0.36x with an increase in cash and the reduction in debt. We expect lower net gearing ratio going forward as the GKE Corp generates higher cash flows.

Diversification into Agri-tech

  • In FY21, Agri-tech segment contributed S$20K in the impact on the Group is small.

Adjustments to our earnings estimates

  • We revised FY22E/FY23E revenue estimates for GKE Corp down 5.9% and 8.8% to S$127.6m and S$136.3m respectively on cautious optimism, with China’s strengthening of commodity price controls which could cap RMC sale prices. However, we remained optimistic on the stability of the warehousing logistics segment, and the growth potential of the infrastructural segment, especially seeing that production capacity has doubled from before FY21 (0.8 million m3) to now (1.6 million m3).
  • Accordingly, PATMI estimates for GKE Corp are revised down by 7.4% and 11.7% for FY22 and FY23, taking into account the Group’s acquisition of non-controlling interest. This translates to an overall +7.2% / +6.8% y-o-y revenue growth or +15.0% / +5.0% y-o-y net profit growth, excluding the one-off S$2.5m gain from disposal of subsidiaries in FY21.
  • As start-up capital costs for Cenxi’s RMC plant had been accounted for in FY21, we lower our capex forecasts for FY22 and FY23.

Maintain BUY rating at higher target price

Lim Li Jun Tracy SAC Capital Research | https://www.saccapital.com.sg/ 2021-08-05
SGX Stock Analyst Report BUY MAINTAIN BUY 0.171 UP 0.163