Results Highlights

• AWC Bhd has posted a 38.4% Y.o.Y increase in its 2QFY19 net profit to RM7.0 mln, compared to RM5.1 mln previously, in-tandem with the consolidation of earnings from Trackwork (PBT: RM3.1 mln), as well as improved earnings from the IFM and Environment segment. Revenue also gained 25.7% Y.o.Y to RM85.9 mln, from RM68.4 mln in 2QFY18.

• Cumulative 1H2018 net profit also expanded 29.2% Y.o.Y to RM13.1 mln, from RM10.1 mln last year, owing to higher turnover from all its segment and significant earnings bump from Trackwork. Revenue, meanwhile, rose 14.8% Y.o.Y to RM154.4 mln, compared to RM134.6 mln in 1H2017.

• AWC’s revenue was more-or-less within our forecast, making up about 54.6% of our expected full year revenue of RM250.7 mln. However, the net profit was below our expectations, accounting for only 44.7% of our full year net profit of RM26.9 mln.

• On a segmental basis, STREAM’s pretax profit tripled to RM3.0 mln, from RM1.7 mln previously on higher progress billings, although the Engineering segment’s pretax profit fell 21.9% Y.o.Y to RM1.3 mln following the completion of several air-conditioning projects. Pretax earnings from IFM contracts were flat, while the newly acquired rail division posted a pretax net profit of RM3.1 mln.

Prospects

Going forward, we think the group will register a strong double-digit net profit growth in FY19, driven by its sizable outstanding orderbook of RM1.0 bln and consolidation of Trackwork’s earnings after AWC completed the acquisition of the 60.0% interest in the former on 9th October last year.

The group will also continue to play catch-up on projects which were delayed last year. To recap, project delays were mainly due to issues from the main contractor with more than half of the RM140.0 mln outstanding orderbook attributed to two prominent engineering projects in Kuala Lumpur. We believe that the revenue from the aforementioned orderbook is likely to be recognised within two- to-three years should the construction progressed as scheduled.

Lastly, we remain positive on AWC’s ability to replenish its orderbook, after securing the engineering project from Lendlease worth RM29.9 mln on 22nd February 2019. We believe that there is a potential for the former to secure more jobs in the future given its proven track record as a premier engineering service provider with projects like Signature Tower, PNB 118 and 8 Conlay firmly under its belt.

Its 2QFY19 net profit was hit by a one-off demobilisation expense due to IFM projects and additional costs related to CARP totaling RM1.3 mln. Although, there will be no reimbursement for the additional charges incurred by the CARP project, AWC has submitted claims for a portion of the demobilisation costs incurred. For now, we have excluded the potential reimbursement in our forecast as the amount is deemed relatively small and unlikely to impact our full-year estimates.

Valuation and Recommendation

We have adjusted our revenue higher after including new contracts secured recently, including the preliminary works and trade contract package totaling RM29.9 mln from Lendlease Projects. Consequently, revenue was increased to RM341.9 mln (+20.9%) and RM360.8 mln (+13.6%) in FY19 and FY20 respectively. Despite expecting stronger revenue ahead, we kept our net profit largely unchanged after increasing our tax assumptions and also profit attributed to non-controlling shareholders.

We maintain our BUY call on AWC with an unchanged target price of RM1.00 as we remain positive on AWC’s long-term earnings accretion from newly secured contracts and fresh earnings from its rail maintenance services. Our target price is based on a target PER of 10.0x to AWC’s FY19 EPS of RM10.2 sen.

The group is currently trading at an attractive forward PER of 7.2x, below its 3-year mean of 10.0x, indicating further upside, in our view.

Our target PER also remain at a discount to its closest peer, UEM Edgenta Bhd, mainly due to 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 increases 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 - 1 Mar 2019