CGS-CIMB Research analysts Kenneth Tan and Ong Khang Chuen have kept their “hold” call on GKE Corp as the company’s results for the 1HFY2024 ended Nov 30, 2023, missed expectations owing to the weak contribution from GKE Corp’s China ready-mix concrete (RMC) business. This resulted in lower-than-expected revenue growth and credit loss provisions of $1.2 million.
On Jan 12, GKE Corp reported a net profit of $1.90 million for the six-month period, which was 90.1% higher y-o-y but down by 35% h-o-h. The figure also made up 32% of CGS-CIMB’s FY2024 forecast for the company.
Revenue from the company’s China RMC business remained “lacklustre” as construction activities in Wuzhou saw little improvement, in the analysts’ view. The company’s credit loss provisions narrowed by 36% on a y-o-y basis, but still came in at $1.2 million, 371% higher h-o-h. “We think [this] reflects GKE’s guarded sentiment towards domestic developers,” they write.
“GKE shared that building activity levels saw little growth year-to-date (ytd), reinforcing our view that RMC volume recovery in FY2024 would likely be bumpy. Our China property analyst expects property sales to remain weak and continue declining in FY2024, though we do see green shoots with policymakers becoming more proactive in helping the sector in a bid to prevent further deterioration,” they add.
Due to the higher credit loss provisions and slower-than-expected pace of recovery in revenue, the analysts have lowered their profit before tax (PBT) contribution for FY2024 to FY2026 from the China RMB business.
Meanwhile, GKE Corp’s Singapore business remains the “sturdy pillar” as its warehousing and logistics revenue grew by 5% y-o-y and 2% h-o-h to $45 million. This came on the back of stronger chemical business contribution from Marquis and Fair Chem industries, positive rental reversions of between 3% to 5% y-o-y for its warehouses, and new contributions from the storage services of dangerous goods (DGs).
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“Warehouse occupancies remained close to maxed out in 1HFY2024, while tenant optimisation efforts were continuously ongoing. Management shared that its recently converted DG yard had commenced operations as of November 2023,” write Tan and Ong.
“As DG cargo likely commands higher rental yield (compared to normal cargo), we expect FY2024 – FY2025 Singapore PBT growth to be driven by improvement in DG occupancies,” they add.
Overall, the analysts have lowered their earnings per share (EPS) estimates for FY2024 to FY2026 due to lesser contributions from China. However, their target price has been increased to 8 cents from 7.6 cents previously.
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The higher target price estimate is due to the analysts rolling their valuation base year forward to calendar year (CY) 2025.
A quick recovery in construction activities in China and stronger margin expansion from GKE’s DG contribution are positive catalysts while prolonged turmoil in China’s property market and higher credit losses are downside risks.
Shares in GKE Corp closed 0.2 cents lower or 2.86% down at 6.8 cents.
