Results Highlights

• AWC posted a 9.0% Y.o.Y fall in its 4QFY17 net profit to RM5.9 mln, from RM6.5 mln previously, despite a 13.1% Y.o.Y growth in revenue to RM86.0 mln, from RM76.0 mln in the previous corresponding period. The weaker earnings were mainly attributed to a slight margin compression in the IFM and environment divisions. The group has also proposed a 1.0 sen per share final single-tier dividend, payable at a date to be announced later. Full year net profit, however, jumped 26.1% Y.o.Y to RM21.6 mln, from RM17.1 mln in FY16 – on improved performance across all divisions. Full year revenue also gained 19.2% Y.o.Y to RM296.1 mln, compared to RM248.5 mln a year ago.
   
• AWC’s reported earnings came in slightly below our expectations as it accounted to 95.6% of our full-year estimated net profit of RM22.6 mln, while the reported revenue was within our estimated FY17 revenue, accounting to about 99.8% of the RM296.8 mln forecast. The variance in the reported earnings was mainly due to lower-than-expected margins, coupled with higher interest expense.

• For the full year, the group saw a strong double-digit growth in FY17’s pretax profit from its IFM (+27.0% Y.o.Y) and environment (+30.0% Y.o.Y) divisions, while the engineering segment jumped 104.9%. The solid improvements were contributed by higher progress billings as well as stronger margins due to the delivery of several completed projects.

Prospects

In 4QFY17, AWC’s IFM division contributed about RM27.7 mln (or 32.2%) to the total group revenue, a slight fall from 35.4% previously. Nevertheless, we expect the IFM division to remain the major contributor to group revenue moving forward – due mainly from higher contribution from its Critical Asset Refurbishment Contract (CARP) and new government contracts secured recently. Meanwhile, PBT from the IFM division plunged to RM2.1 mln (-63.0% Y.o.Y), dragged down by lower gross margins in 4QFY17, although we do expect to see a recovery in its bottomline going forward, in-tandem with higher sales forecast.

The environment division reported a 7.0% Y.o.Y increase in revenue to RM21.1 mln, from RM19.7 mln in 4QFY16, attributed to project delays experienced in the previous corresponding quarter. Earnings-wise, PBT narrowed 7.4% Y.o.Y to RM6.3 mln, weighed down by the delivery of big ticket items which has higher gross margins in 4QFY16. Even so, we think that the growth prospects for the division remains healthy, flanked by sufficient projects to provide earnings visibility in the next two years.

As expected, AWC completed the Xiamen University project in FY17, while the Capital 21 neared its completion. Consequently, revenue for the quarter gained 29.7% Y.o.Y to RM37.1 mln, from RM28.6 mln last year, boosting PBT for the engineering division to RM3.3 mln (+65.0% Y.o.Y), against RM1.3 mln in 4QFY16. Bottomline growth was also contributed by higher margins earned by the plumbing segment. We are positive that AWC will be able to replenish its orderbook, following the delivery of certain completed projects, given its proven track record and notable projects like the Signature Tower (TRX) and MAS building refurbishment and construction contract in its portfolio. The group’s total outstanding orderbook, meanwhile, stood at about RM1.13 bln as at 31st July 2017.

Valuation and Recommendation

Although the reported earnings were marginally below our estimates, we leave our FY18 earnings and revenue forecast unchanged at RM23.2 mln and RM329.4 mln respectively, premised on a higher sales outlook, with about a 7%-8% net margin. Consequently, we maintain our BUY recommendation on AWC with an unchanged target price of RM1.20. Our target price is derived from ascribing a unchanged target PER of 14.0x to our FY18 EPS of 8.7 sen – a discount to AWC’s nearest competitor, UEM Edgenta Bhd, due to the former’s smaller market capitalisation.

Risk to our recommendation and target price include failure to replenish its targeted orderbook and project delays due to the cyclical risks inherent to the construction industry, which could lead to unforeseen cost increases and reputational damage. Escalating utility cost and increase in the prices of consumables could also compress the margins of the IFM contracts, while any fluctuation in the cost of raw materials could also impact AWC’s margins in the already saturated heating, ventilation & airconditioning (HVAC) market.

Source: Mplus Research - 5 Sept 2017