Brokers' take: CGS-CIMB raises target price of GKE Corp to S$0.21

CGS-CIMB has maintained "buy" on warehousing and logistics provider GKE Corp 595 as analysts Ong Khang Chuen and Kenneth Tan forecast its core net profit to grow 140 per cent to S$11.3 million in its upcoming results for the financial year ended May 2021.

Both analysts believe that the Catalist-listed group's high ready-mix concrete (RMC) volumes and pricing in China, as well as its robust warehousing performance in Singapore, will drive this growth.

In particular, they believe that GKE's Wuzhou RMC plant enjoyed strong volumes in the second half of its financial year on the back of its 50 per cent increased capacity and robust demand for construction materials.

According to CEIC, a global database of market data, fixed asset investments in Wuzhou, China, year to date has grown 25 per cent year on year (y-o-y), suggesting healthy construction activities there.

The analysts also projected further earnings growth in 2022 as the company takes advantage of growth initiatives in Cenxi City, China, where GKE has a second RMC plant and a 24 per cent stake in a construction waste material recycling plant.

In Singapore, the analysts also liked that GKE's warehouse utilisation remains optimal as customers stockpile. As the group optimised its tenant mix in the second half of FY2021, it was also able to benefit from higher rental rates.

They also expect continued strength in occupancy and cost savings from lease renewal which would help grow GKE's profit before taxes in its Singapore operations by 212 per cent y-o-y to S$5.6 million in 2021, with a further 40 per cent expansion next year.

Looking at GKE's acquisition of Marquis Services, a chemicals storage and management specialist, the analysts also expect the acquisition to be accretive to GKE's earnings per share (EPS) by 4 per cent in the next financial year.

"Potential catalysts include further recovery in Singapore's port container throughput and earnings accretive mergers and acquisitions. Downside risks include a longer-than-expected path to profitability for GKE's new growth initiatives," the analysts said.

Therefore, the analysts raised their EPS forecasts by 5.9 to 15.6 per cent and lifted their target price to S$0.21. At that price, GKE would be trading at a price-to-earnings ratio of 10.3 times.

They also expect dividend payouts to resume. Assuming a dividend payout ratio of 20 per cent, its distribution per share would amount to 0.28 Singapore cent, or a 2.1 per cent dividend yield.

At the midday break, shares of GKE were flat at 14.5 Singapore cents.