Results Highlights

• Despite stronger revenue performance, AWC’s 3QFY19 net profit was almost unchanged at RM6.9 mln, mainly due to higher portion of income attributed to non-controlling shareholders. Revenue for the quarter rose 18.1% Y.o.Y to RM88.9 mln, from RM75.3 mln last year.

• Cumulative 9MFY19 net profit, meanwhile, gained 17.8% Y.o.Y to RM20.0 mln, from RM17.0 mln in the last corresponding period, in-tandem with the 16.0% Y.o.Y jump in revenue to RM243.3 mln, against RM209.8 mln a year ago.

• AWC’s latest earnings underperformed our expectations, coming in at 67.4% of our previous full-year estimated net profit of RM29.7 mln. In contrast, revenue was within our forecast, accounting for 71.2% of our full-year revenue of RM341.9 mln. The differences were mainly due to the lower-than-expected orderbook replenishment rate and higher tax charges. We also expect 4QFY19 to play catch-up as net profit is likely to benefit from a potential impairment (bad debt) writeback, which is likely to be one-off in nature.

• Subsequently, we trimmed our FY19-FY20 earnings assumptions by 5.4%-6.2% to RM28.1 mln and RM30.6 mln respectively, while revenue was reduced by about 5.0% to RM323.9 mln and RM342.8 mln respectively. The adjustments were made to reflect our lower contract replenishment target and higher interest costs.

Prospects

Moving forward, we continue to foresee twin growth in both its topline and bottomline, with a 3-year CAGR of 11.6% to RM30.6 mln in FY20. With a substantial orderbook (about RM1.02 bln) which will keep the group busy until FY25 and healthy balance sheet, as well as robust growth opportunities in the engineering and rail segment, we believe AWC will have no problems maintaining its upward growth trajectory in the longrun.

Given its expertise in the engineering, rail and STREAM industry, we also expect to see more contracts announced in FY20 as the government revives several mega infrastructure projects which were previously shelved. To recap, AWC secured a (rail grinder) supply package for MRT 2 from China Communications Construction last month, which further strengthen its ability to snag high-profile contracts.

Downside risks include unexpected project delays and slower-than-expected contract replenishment rate.

Valuation and Recommendation

We reiterate our BUY call on AWC with lower target price of 95.0 sen as AWC’s earnings growth remains on-track, driven by consistent revenue stream from the IFM segment and substantial orderbook size of around RM1.02 bln. Our target price is based on a unchanged target PER of 10.0x to AWC’s FY19 EPS of RM9.6 sen.

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 - 28 May 2019