Results Highlights

• AWC’s 4QFY19 net profit plunged by almost 100.0% to a mere RM38,000, from RM4.4 mln previously, attributed to several one-offs; cost overruns, deferred revenue recognition due to MFRS 15, in addition to an amortisation charge from intangible assets following the acquisition of Trackwork. Revenue also fell 15.3% Y.o.Y to RM79.7 mln, from RM94.2 mln in the same period last year. The group has also declared a final single-tier dividend of 1.0 sen per share, payable on a date to be announced later.

• Consequently, the severe quarter dragged down the full-year FY19 net profit to RM20.0 mln (-6.2% Y.o.Y), from RM21.4 mln last year, despite recording a higher revenue of RM323.1 mln (+6.3% Y.o.Y), from RM304.0 mln previously.

• Although revenue was in-line with our forecast, coming in at 99.7% of RM323.9 mln, however, we were disappointed to see that full-year net profit was significantly below expectations; contributing only 71.4% to our estimated FY19 net profit. The variation was mainly due to the aforementioned one-offs as well as a spike in depreciation charges due to the amortisation charge from intangible assets.

• Subsequently, we trimmed our FY20 earnings assumptions by 12.3% to RM25.0 mln, but increased our revenue estimates to RM354.2 mln (+10.6%) after gathering new pointers from an analysts’ briefing. The adjusted bottomline reflect a more cautious EBITDA margins assumption, in-tandem with increasing costs and prolonged weakness from the engineering segment amid decreasing revenue contribution. We also introduce our FY21 net profit and revenue forecast at RM26.1 mln and RM381.5 mln respectively.

Prospects

We still like AWC for its steady cashflows from the IFM segment and we are confident of the group’s capability in maintaining its long-term relationship with its customers like JKR, supported by its track record and expertise in the IFM industry. Revenue from the IFM contracts still account for the majority of the group turnover at around 47.0%- 56.0% and this trend is expected to continue in the foreseeable future.

Meanwhile, the latest contract award from the Ministry of Health, which involves hospital support services for the National Cancer Institute, is expected to have better margins compared to its usual IFM contracts. It is also commendable that the group managed to snag the contract as it is quite sizable compared to the IFM contracts secured last year (about RM3.9 mln – RM35.0 mln).

Moving forward, bottomline margins are expected to be within 6.8%-7.1% in FY20-FY21, due to rising operational costs. At first glance, net profit margin (i.e.: 6.2%) in FY19 was lower than the previous year, but core net profit after adding back the aforementioned one-offs: cost overruns (RM1.3 mln), deferred revenue recognition (RM0.5 mln), patent registration and maintenance costs for STREAM (RM0.9 mln) and amortisation of intangible assets due to the acquisition of Trackwork (RM3.0 mln) totalled RM25.7 mln, resulting in a net profit margin of 8.0%, exceeding FY18’s 7.1%.

Outstanding orderbook as at July 2019 stood at RM978.7 mln, while tenderbook amounted to more than RM1.5 bln currently.

Valuation and Recommendation

Despite the weak performance in the latest quarter, we maintain our BUY call on AWC with lower target price of 80.0 sen (from 95.0 sen) after rolling forward our valuation to FY20 as its near-term earnings growth story remains intact; backed by a sizable orderbook of close to RM1.0 bln, profit consolidation from Trackwork and strong balance sheet.

Our target price is based on a lower target PER of 9.0x (from10.0x) to AWC’s FY20 EPS of 8.9 sen. Re-rating catalysts include recovery in the construction segment from the revival of several mega infrastructure projects. Our target PER also reflects AWC’s latest three-year mean and remains 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 Aug 2019