GKE Corp - CGS-CIMB Research 2023-01-17: Worst Likely Over But Bumpy Recovery Ahead

GKE Corp - Worst Likely Over But Bumpy Recovery Ahead

  • GKE Corp (SGX:595)'s 1HFY23 (Jun 2023 to Nov 2023) net profit of S$1.0m (+12% h-o-h, -74% y-o-y) below our expectations at 14% of our FY23F. The miss was attributed to S$2.0m of credit loss allowances provided for some of its receivables in China. Group revenue came in flat y-o-y, with stronger warehousing offset by weak infrastructure. Operating profit margin declined 3.1% points y-o-y on the back of operational deleverage from weaker volumes in China ready-mix concrete (RMC) business, and credit loss allowances.
  • GKE Corp's 1HFY23 warehousing and logistics revenue growth of 20% y-o-y was largely driven by
    1. financial contribution from specialty chemicals subsidiary Fair Chem acquired in Jan 22,
    2. increased capacity for Dangerous Goods (DG) storage at newly converted yards, and
    3. continued positive warehouse rental reversions of ~5% y-o-y.
  • The conversion of space into DG storage enhanced rental yields, helping segment PBT margin to expand 1.1% points y-o-y to 13.3% in 1HFY23 (vs. 1HFY22: 12.2%).
  • We understand that GKE Corp’s warehouses remain at close to full occupancy, with tenant mix optimisation ongoing. GKE Corp plans to carry out more asset enhancements to grow its DG storage capacity. In view of higher-margin DG mix, we raise our FY23-25F segment PBT by 20-21%.
  • GKE Corp’s ready-mix concrete (RMC) operations in China were adversely impacted by China’s housing market slump and tight pandemic measures imposed, with 1HFY22 revenue declining 40% y-o-y to S$11.2m. Segment PBT margin fell into the red due to credit loss allowances made.
  • While we think the worst is over operationally given recent easing of pandemic measures in China and easing of “three red lines” policy for the property sector, we expect construction activities to only recover more meaningfully in FY24F. In 2HFY23F, we still see risks on higher credit loss allowances. We now expect segment PBT breakeven in 2H23F, while our FY24-25F segment PBT is cut by 37-47%.
  • While we believe the worst is likely over for GKE Corp, we remain cautious near-term on the pace of recovery in its China RMC operations, given higher credit risk environment. Our SOP-based target price is lowered to S$0.094. Reiterate HOLD on GKE Corp.

Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.

Kenneth TAN CGS-CIMB Research | ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2023-01-17

Previous report by CGS-CIMB:
2022-07-28 GKE Corp - Ready-Mix Concrete (RMC) Operations Remain Challenging In China.

Price targets by other brokers at GKE Corp Target Prices.
Listing of research reports at GKE Corp Analyst Reports.

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