Highlights

• AWC Bhd has announced that its former client, BUCG (M) Sdn Bhd has filed a counterclaim against the group’s subsidiary, Qudotech in a bid to seek general and special damages of approximately RM11.0 mln and other reliefs.

• Although the group is of view that the counterclaim is not justifiable, the group has concurred that the RM11.0 mln claim is significant and could potentially impact AWC’s earnings and net asset per share if BUCG wins the case against the group.

• To recap, BUCG awarded a RM10.2 mln contract to Qudotech Sdn Bhd to carry out and complete the whole plumbing services installation works of a project named ‘Banyan Tree Pavilion Residences‘, located in Jalan Conlay, Kuala Lumpur on 14th November 2012. However, BUCG later failed to settle the unpaid portion of the outstanding contract sum of RM2.1 mln even after Qudotech had issued a letter of demand dated 20th July 2018 and another letter to BUCG claiming for the said outstanding payment.

• Consequently, AWC had filed a writ of summons together with the statement of claim against BUCG for the alleged outstanding payment from BUCG after several failed attempts to recover the aforementioned debt.

Prospects

Despite the potential severity of the damages to AWC, we have opted to exclude the legal damages from our forecasts due to the uncertainties surrounding the aforementioned claims and its timeframe at the current juncture.

Meanwhile, AWC believes that the liquidated and ascertained damages (LAD) claim by BUCG is not realistic as the defects liability period (DLP) of the project has expired. Further, the group also added that the owner of the project, Pavilion Group has not imposed any liquidated and ascertained damages (LAD) on its main contractor, BUCG.

Assuming the worst case scenario where AWC is liable for the RM11.0 mln, we expect to see a potential 35%-39% cut in our FY19-FY20 earnings estimates.

In the meantime, it is also possible for AWC to be required to make a provision for the potential losses arising from the lawsuit, although the provision can be reversed in the event that the claim is no longer probable.

Meanwhile, its net asset per share as at 30th June 2018 could also fall by 5.5% to 65.6 sen, from 69.4 sen previously after accounting for the legal liability.

Valuation and Recommendation

We maintain our BUY recommendation on AWC with an unchanged target price of RM1.20 by ascribing an unchanged target PER of 12.0x to its FY19's EPS of 9.9 sen until we can determine with more certainty the outcome of the aforementioned lawsuit. Our target PER remain at a discount to its closest peer, UEM Edgenta Bhd, mainly due to the AWC’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 that 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 HVAC market.

Source: Mplus Research - 2 Nov 2018