Brokers' take: CGS-CIMB lowers GKE target price on tougher operating environment in China

CGS-CIMB has lowered its target price for GKE Corporation from S$0.21 to S$0.16 to reflect lower revenue and margin assumptions on the China infrastructure materials segment, the brokerage stated in a research report on Tuesday (Jan 18).

The new target price implies a valuation of 11.7 times the stock's 2022 price-to-earnings ratio for the calendar year. It comes after CGS-CIMB lowered its core earnings per share estimates for GKE by 41.4 per cent for FY2022, 24.7 per cent for FY2023 and 16 per cent for FY2024.

This is because the brokerage has turned more cautious of China's infrastructural materials segment. It believes that the tight liquidity environment will impact GKE's supply chain in the short term.

As a result, CGS-CIMB expects segment profit before tax to decline year on year by 45 per cent in FY2022.

Nevertheless, the brokerage has reiterated its "add" call on the stock as GKE's urbanisation plans in lower tier cities encourage optimistic outlooks for the contractor's longer-term prospects in China.

This comes after GKE's net profit of S$3.8 million fell below expectations, at 27 per cent of the brokerage's net profit estimates for FY2022 as a result of "weaker-than-expected China operations".

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However, the brokerage remains optimistic on GKE as the logistics segment revenue climbed 16 per cent attributed to the "continued tenant mix optimisation and positive rental reversions".

CGS-CIMB is also positive on the company's recent acquisition of Fair Chem Industries which is to be completed by the end of February 2022.

"It provides GKE with deeper technical expertise in the tolling and speciality chemical manufacturing business, revenue synergies through cross-selling and expansion in warehouse capacity," said the brokerage of the acquisition.

Shares of GKE closed lower by 0.2 Singapore cent or 1.7 per cent to S$0.114 on Wednesday.