GKE Corp – A possible turnaround story unfolds (17 Jun 16)

On 16 Oct 2015, after seeing GKE Corp garnering significant media attention upon entering into a sales and leaseback agreement with Viva Industrial Trust for GKE’s existing headquarters cum warehouse property located at 30 Pioneer Road, I wrote a write-up on GKE. (See here for my previous write-up)

Most of the updates outlined in my previous write-up have occurred, thus it is apt to provide an update on GKE’s upcoming developments in 4QFY16F (Financial year ends in May) and FY17F and beyond.


Gain of S$12m to be recognized in 4QFY16F

According to GKE’s announcement, the disposal of 30 Pioneer road was completed on 15 Apr 2016. With the disposal, GKE will receive S$45m in sales proceeds and book in an approximate gain amounting to S$12m. This is noteworthy on multiple fronts, viz.

a) With S$45m in sale proceeds, GKE cash will balloon to S$55.6m (assuming cash remains at S$10.6m as per 3QFY16). This cash hoard will prove useful for their redevelopment of 39 Benoi Road and future business opportunities and

b) The sale proceeds of S$45m are considerable vis-à-vis their market capitalization of S$55.7m.


Redevelopment of 39 Benoi Road expected to be completed by Mar 2018

According to GKE’s 1 Mar 2016 press release, GKE expects to complete the redevelopment of the Benoi Road by Mar 2018. With this redevelopment and expansion, GKE’s will double its warehousing space from 200,000 sq ft to 400,000 sq ft. In addition, there will be an open yard storage space of 130,000 sq ft. This should boost its warehousing and logistics business revenue in FY19F onwards.


GKE Metal Logistics may have asset impairment

On 1 Mar 2016, GKE announced that the Memorandum of Understanding with Hung Lin Holding Ltd to sell 49% of GKE Metal Logistics has lapsed. It is common knowledge that the non-ferrous market has deteriorated and I guess that there may be some impairment charge amounting to around S$3-4m in 4QFY16F. However, my guess is even with a possible impairment, it is unlikely to wipe out the whole gain on disposal of 30 Pioneer Road.


Ship chartering to commence meaningful contribution in FY17F

GKE announced on 15 Mar 2016 that it has secured a chartering contract of six months starting mid Apr 2016, with an option of additional six months for its liquefied gas carrier vessel. Inclusive of the six months’ option, the charter contract is up to US$12m at a gross rate of US$33,000 per day. GKE remains optimistic to secure a longer term chartering contract in due course.

GKE’s optimism is corroborated by Avance Gas Holding, the listed Norwegian very large gas carrier owner (“VLGC”). Avance, in its most recent results, reiterated an optimistic view on the VLGC market citing a combination of several factors such as growth in Asian imports and U.S. exports, coupled with steady export volumes from the Middle East.


Ready-mix cement plant to start contribution in FY17F

On 2 Jun 2016, GKE announced that it has successfully obtained the Construction Enterprise Qualification certificate (“CEQ certificate”) from the Ministry of Housing and Urban-Rural Development of the People’s Republic of China and commenced commercial production for its automated ready mix cement plant in Wuzhou City. Under China’s regulations, the ready-mix cement producers can only begin selling their products after they received the CEQ certificate.

With this CEQ certificate, GKE can start to negotiate effectively for offtake supply contracts and it expects the ready mix cement to start contribution in FY17F. In view of the ongoing urbanization plants in Wuzhou city, my personal take is that this ready mix cement plant is likely to be the earnings driver for FY17F and more so in FY18F.

Incidentally, GKE is inviting analysts and media to China to visit their cement ready-mix factory from 4 – 6 Jul 2016.


Marquis’ aggregate profit before tax guarantee of S$2.8m for two years

On 26 Oct 2015, GKE announced that it is acquiring 70% stake in Marquis Services for S$2.94m. This acquisition comes with a profit before tax guarantee by Marquis for the financial period 1 Dec 2015 to 30 Nov 2017, which shall not be less than the aggregate amount of S$2.8m. Thus, this is an earnings accretive acquisition. GKE reported in its most recent 3QFY16 results (ending on 29 Feb 2016) that Marquis has already started its maiden contribution.



With the S$12m gain on disposal of 30 Pioneer Road, coupled with S$1.2m gain on disposal of 40% interest in Mao Ming, FY16F (which should be announced by late next month) should be profitable even if I take into account of the possible write-down in GKE Metal. With reference to GKE’s dividend announcement on 30 Jul 2009, GKE announced that it will distribute at least 10% of its net profit as dividends if the net profit is at least S$2 million. Although there is no formal dividend policy, judging from the previous years’ dividend record, GKE seems to give dividends when it is profitable such as FY12 and FY13. Thus, my personal guess is that there is a chance that GKE may give dividends in FY16F, especially when it has not done so in the past two financial years.


Chart analysis

Since 29 Jan 2016, share price has been very resilient and traded between $0.080 – 0.089 despite the market volatility. STI has slumped 4.1% from an intraday high of 2,882 on 9 Jun 2016 through 17 Jun close. However, GKE actually moved up 1.1% over the same period. Based on Chart 1 below, although GKE has traded within $0.080 – 0.089, OBV is showing a bullish divergence and is at an all-time high. Generally speaking, a rising OBV amid a trading range signifies accumulation, which is bullish. ADX is strong at 51.2, indicative of a trend. 21D, 50D, 100D exponential moving averages (“EMAs”) seem to be rising and pulling apart after their earlier convergence. This is another bullish sign. All in, there is a high probability that GKE may breach $0.089 in the next couple of months. An eventual technical measured technical target is around $0.098 on a bullish sustainable break above $0.089 with volume expansion.


Chart 1: GKE’s share price remains resilient

GKE chart as of 17 Jun 16 

Source: CIMB chart as of 17 Jun 2016



At its last closing price of $0.088 on 17 Jun 2016, GKE trades at 0.72x P/BV. With reference to Chart 2 below, GKE trades at an average 0.88x P/BV since 30 Jun 2011. Based on GKE’s current NAV / share of $0.122, this translates to S$0.108 at 0.88x P/BV. This is notwithstanding the possible increase in NAV / share upon the recognition of the above disposal gains.

Chart 2: GKE trades at an average 0.88x P/BV from 30 Jun 2011 to 31 May 2016

gke price to book past 5 years since 30 Jun 2011

Source: Bloomberg as of 17 Jun 2016



In view of the GKE’s developments coming to fruition (GKE’s ready-mix cement factory to contribute in FY17F and FY18F, and GKE’s warehousing and logistics business’ meaningful growth in FY19F etc.), this company seems a possible turnaround story after FY14 & FY15 loss-making years.

Readers who are interested to know more should visit GKE website (click here) and SGX for more information. Readers should also refer to my previous write-up for more information, as well as, some of the possible investment risks in GKE (click here).



Please refer to the disclaimer here.

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