RMC operations remain challenging
2HFY5/22 net profit of S$0.9m (-82% yoy) was below expectations due to weaker-than-expected China operations. Final dividend of 0.2 scts proposed.
China operations likely to remain pressured by property market slump and strict pandemic control in FY23F; we expect segment PBT to remain flattish.
Singapore operations should remain resilient and well-positioned for earnings growth in FY23F. Reiterate Hold. Our SOP-based TP remains at S$0.10.
2HFY5/22: Weaker than expected China operations
GKE’s 2HFY5/22 net profit of S$0.9m (-77% hoh, -82% yoy) was below our expectations. 2HFY22 net profit of S$4.7m (-59% yoy) formed 69% of our forecast. The miss was mainly due to weaker-than-expected China operations, which were affected by 1) lower ready-mix concrete (RMC) volumes due to a construction slowdown, 2) resulting operating deleverage, and 3) higher effective tax rate due to new business initiatives that have yet to contribute positively. Singapore’s profit contribution was in line with our expectations. GKE proposed a final dividend of 0.2 Scts (FY21: 0.4 Scts), translating into a yield of 2%.
Operations in China to remain challenging in the near-term
Infra revenue further declined in 2HFY22 to S$11m (-41% hoh, -53% yoy), as GKE was affected by the housing market slump, China’s tight pandemic controls, and weaker seasonality from Chinese New Year. PBT margin decreased to 3.5% (vs. 2HFY21: 12.4%) due to operating deleverage, as well as start-up losses from the new Cenxi RMC plant which has yet to obtain the licence to commence operations. We expect a challenging operating environment in the near-term. We also expect segment PBT to stay flattish in FY23F as the commissioning of Cenxi RMC plant is likely to be delayed to 2HFY23F.
Warehousing and logistics in Singapore still going strong
2HFY22 warehousing and logistics revenue rose 10% yoy to S$38.5m, driven by 1) positive warehouse rental reversions, and 2) 4-month contribution from Fair Chem acquisition. Despite the absence of job support scheme (JSS), segment PBT margin rose yoy to 10.1% (vs. 2HFY21: 8.9%) due to better tenant optimisation and higher-margin Fair Chem works. We expect stronger segment PBT to rise 18% yoy in FY23F, especially helped by 1) expanded DG storage capacity (conversion of yard space at 39 Benoi Road), which should start contributing 1HFY23, and 2) full-year contribution from Fair Chem.
Retain Hold with a TP of S$0.10
Maintain Hold. We cut our FY23-24F EPS by 20-24% due to China weakness, which eclipsed our raised estimates for Singapore operations. Our SOP-based TP remains at S$0.10, as the lowered valuation from China business (lower P/E multiple) was offset by Singapore’s strength. Upside risks include government support aiding a rapid recovery in China’s construction sector. Downside risks include higher credit losses and prolonged turmoil in China’s property market.
