CGS-CIMB Research analysts Kenneth Tan and Ong Khang Chuen are keeping their “hold” call on GKE Corp 595 as they are expecting the company’s financial results for the FY2024 ending May 31, 2024, to remain weak.
In the same vein, Tan and Ong have lowered their target price on the company to 7 cents from 9 cents previously.
GKE Corp will be releasing its results for the 2HFY2023 and FY2023 ended May 31 in the last week of July. While the analysts estimate that the company’s 2HFY2023 results will see improvement with a 64% y-o-y growth and 46% h-o-h improvement to a net profit of $1.5 million, they also see that its earnings are likely to have bottomed in FY2023.
During the 1HFY2023 ended Nov 30, 2022, GKE Corp’s earnings – or net profit – plunged 73.8% y-o-y to $998,000. Its profit before tax, too, fell by 61.0% y-o-y to $2.2 million. At the time, the lower earnings were due to lower contributions from the company’s infrastructural materials and services segment which was dealing with China’s zero-Covid policy at the time. The lower figure was also due to a reversal of foreign exchange (forex) gains in 1HFY2022 and the increase in the allowance of expected credit loss for receivables in its China operations.
This time, GKE Corp’s 2HFY2023 results are likely to be driven by increased contribution from its higher-margin Singapore initiatives.
“[The company’s] Singapore operations likely showed stable earnings growth in 2HFY2023, with room for further upside in FY2024 via expansion of its dangerous goods (DG) product mix,” the analysts write.
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The company is also expected to report six months’ worth of contribution from its specialty chemicals subsidiary Fair Chem. Fair Chem was acquired by the company in December 2021 for $12.5 million. GKE’s segment profit before tax (PBT) for 2HFY2023 should come in at around $6.0 million, up 53% y-o-y and 4% h-o-h, the analysts write.
In addition, they note that the company’s Singapore warehousing and logistics segment should do well with further rental reversions. According to JTC, Singapore’s rental rates for warehouses rose by 9.4% y-o-y and 2.9% q-o-q in the 1Q2023. Average occupancy remained flat y-o-y at 90.3%.
Meanwhile, the pace of recovery in the company’s segments in China is expected to remain uncertain, in line with the uncertain pace of recovery in the country’s construction activities.
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The analysts also note that the Chinese property market still remains sluggish with the China Real Estate Information Corporation (CRIC) estimating that sales of the top 25 Chinese developers fell 12% m-o-m in May. The CRIC is one of the largest real estate brokers in China.”
“According to our China property analyst, ongoing weakness in property sales can likely be attributed to: [a] sluggish post-Covid-19 economic recovery in China, high unemployment levels, and reduced income levels in China,” say Tan and Ong.
“Based on our recent chat with GKE’s management, we understand that GKE remains cautious on the pace of recovery for its China ready-mix concrete (RMC) business. While we believe its RMC segment turned PBT positive in 2HFY2023 on better volumes and lower credit costs, we cut FY2024 - FY2025 segment PBT by 11% - 19% as the pace of recovery remains uncertain, in our view,” they add.
In addition to their lowered target price, Tan and Ong have cut their earnings per share (EPS) estimates for FY2024 to FY2025.
“We maintain ‘hold’ until we see clearer signs of a recovery in China construction activities. Our sum-of-the-parts (SOTP)-based target price is reduced to 7 cents given the EPS cuts,” they write.
To them, a faster-than-expected recovery in China’s construction sector is a catalyst for the company’s earnings while downside risks include higher credit losses and a prolonged turmoil in China’s property market.
Shares in GKE Corp closed 0.2 cents higher or 2.86% up at 7.2 cents on June 14.
