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CGS-CIMB makes 'buy' call on GKE Corp with S$0.18 target price

GKE seen to gain from recent developments in Singapore and China

Analysts expect that muted incoming industry supply for warehouse space over the next two years can also support higher rental yield.


CGS-CIMB has initiated coverage on Catalist-listed GKE Corp with an "add" rating and S$0.18 target price, as it sees the logistics solutions provider as a potential beneficiary from recent developments in Singapore and China.

In a Wednesday report, analysts Ong Khang Chuen and Kenneth Tan said they are forecasting the group's net operating profit after tax to grow by 93 per cent in FY5/21.

This is expected to come on the back of favourable dynamics in Singapore's warehousing industry and GKE's ongoing growth initiatives in China.

Based on recent channel checks, the analysts believe demand for warehouse space in Singapore has "strengthened significantly" in H2 2020 due to enhanced medical supply stockpiling.

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GKE's warehouses are currently running at maximum capacity according to the group's management, who added that they are also looking to focus on higher-yield tenants going forward.

As such, Mr Ong and Mr Tan are anticipating "robust" margin expansion for GKE.

They forecast the group's warehousing and logistics business to achieve 69.7 per cent year-on-year segment profit before tax growth for FY2021.

Muted incoming industry supply for warehouse space over the next two years could also support higher rental yield, add the analysts.

In China, GKE is expanding its presence into Cenxi City with its recent acquisition of a 24 per cent stake in a construction waste material recycling plant as well as a ready-mix cement (RMC) plant, both scheduled to commence operations in Q1 2021.

The group also owns a mining licence for a limestone mine in Cangwu County, which it monetised by forming an 18 per cent owned joint venture with two external parties in May 2019.

The analysts expect these new initiatives to underpin GKE's estimated net profit compound annual growth rate of 49 per cent over FY2020-2023.

With heightened construction activities in China translating to stronger RMC demand, they predict the group's infrastructure materials segment to record a 64 per cent growth in segment profit for FY2021.

"We see strong earnings growth potential for GKE in FY21F, riding on Singapore's enhanced medical supply stockpiling and China's infrastructure boom, supporting our forecast of 21 per cent year-on-year increase in revenue and operating profit margin expansion to 11 per cent (from 8 per cent in FY20)," said Mr Ong and Mr Tan in their report.

"Potential catalysts include stronger-than-expected H1 FY21 results, and further recovery in Singapore's port container throughput.

"Downside risks include longer-than-expected path to profitability for GKE's new growth initiatives, including the waste material recycling and RMC plant in China."

Shares of GKE ended Thursday 0.6 Singapore cent or 4.4 per cent lower at 13.2 Singapore cents.

Amendment note: An earlier version of this article incorrectly stated GKE's recently-acquired construction waste material recycling plant as well as a ready-mix cement plant were both scheduled to commence operations in Q1 2020. It is in fact Q1 2021. The article above has been revised to reflect this.

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