Brokers' take: SAC Capital downgrades GKE Corp to 'hold', lowers TP

SAC Capital has downgraded GKE Corporation 595 : 595 0%to "hold" from "buy" after the integrated warehouse and logistics solutions provider's first half FY2022 results missed expectations.

The research team has also lowered its target price (TP) to S$0.123 from S$0.171, after cutting its FY2022 and FY2023 revenue and net profit estimates for GKE.

The new TP is 13.5 times the analyst's estimates for FY2022 earnings and 13.4 times its forecast for FY2023 earnings. It also translates to a potential upside of 10.8 per cent from GKE's closing price of S$0.111 on Wednesday (Jan 26). The counter had ended up S$0.001 or 0.91 per cent.

GKE's revenue of S$55 million was 43 per cent of SAC Capital's FY2022 projection, said analyst Lim Shu Rong. Net profit also fell short, with the reported S$3.8 million being 34 per cent of the brokerage's expectations, added the analyst.

The shortfall was attributed to a 35 per cent drop in ready-mixed concrete sales in China. Lim expects the decline in demand to continue for the second half of FY2022 with the off-peak winter season and Chinese New Year holiday, as near-term demand relies on current ongoing projects, which could be disrupted by bad debt and disruptions due to tight liquidity in the China property market.

"Property investment in China will be slow to recover as developers continue to manage their debts in compliance with China's 3 redline policy," the analyst noted, adding that such investments had declined 14 per cent year on year in December 2021.

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However, Lim also highlighted that GKE could leverage its logistics business in Singapore, as the area is positioned for growth. The analyst cited increasing occupancy for warehouses at 90.1 per cent in Q3 FY2022 (vs Q2's 89.7 per cent), improving rental index at 85.7 and a tight market that could boost warehouse utilisation until new supply comes on stream.

GKE's dangerous goods (DG) warehouses at 39 Benoi Road and 6 Pioneer Walk, expected to complete in end-February and April respectively, could capitalise on new regulations capping the volume of stored DG in each location, Lim observed.

Although DG storage returns are 3 times that of normal warehouses and 70 per cent of Pioneer Walk's storage capacity has already been taken up, contributions will only materialise from FY2023 as such facilities require authorities' certification to be operational, Lim added.

Additionally, GKE's acquisition of chemical plant Fair Chem Industries is expected to contribute in February 2022 when the acquisition completes, as it offers "synergistic opportunities", such as extending GKE's logistics services to Fairchem's customers, the analyst said.

READ MORE:

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

• Twin engines of warehousing and concrete production drive returns for GKE

• China property M&A deals pick up in relief for developers