Summary

• AME Elite Consortium Bhd's 2QFY21 net profit fell 45.7% YoY to RM11.4m, as there was a one-off fair value gain on investment properties of RM7.3m recognised in the previous corresponding quarter. Adjusted to the normalised net profit for the previous corresponding quarter, the reported figure would only fall 13.9% YoY. Revenue for the quarter, however, gained 47.8% YoY to RM120.9m. For 6MFY21, cumulative net profit fell 51.0% YoY to RM16.7m. Revenue for the period declined 0.3% YoY to RM175.6m.

• The reported earnings came below our expectation, amounting to 26.2% of our estimates at RM63.9m and 32.5% of consensus forecast of RM51.5m. Meanwhile, the reported revenue came slightly below expectations, at 45.2% of our estimated revenue of RM388.3m and 46.8% of consensus forecast at RM375.3m.

• In 2QFY21, only the property development segment delivered improvement on the bottom line with EBIT surging 306.6% YoY to RM10.0m, due to the higher billing from work completed. Despite that, the move was offset by the margins compression from the construction and engineering services segment amid the higher fixed overhead cost.

• As of 2QFY21, AME is equipped with an unbilled construction orderbook of approximately RM200.0m, representing unbilled orderbook-to-cover ratio at 1.1x against FY20 construction revenue of RM185.2m that will provide earnings visibility over the next two years. We also opine that the recent acquisition of 169.8-ac land in Johor bodes well for landbanking replenishment activities.

• Moving forward, we believe that AME will be able to capitalise on the initiative delivered under Budget 2021 which entails RM100.0m for the maintenance of infrastructure of industrial parks and RM42.0m under JENDELA to improve internet connectivity in 25 industrial parks. Manufacturers of pharmaceutical products will enjoy 0-10% tax rate for 10 years for investment in Malaysia which may attract foreign investors to re-locate or expand their facilities also bodes well for AME.

Valuation & Recommendation

• With the reported earnings coming below our forecast, we trimmed our earnings forecast by 22.2% and 10.3% to RM49.7m and RM67.3m for FY21f and FY22f respectively to account for the weaker margins from the construction and engineering services segment. Consequently we downgrade our recommendation on AME to HOLD (from BUY) with a lower target price of RM2.21 (from RM2.29) following the recent rise in share price that has reflected its fundamentals value.

• Our target price is derived by ascribing a higher target PER of 14.0x (from 13.0x) to its revised FY22f EPS of 15.8 sen. The revised target PER is due to the higher valuation of the construction sector as of late that reflects the optimism surrounding Budget 2021. A re-rating is in the cards, should margins recovery come above expectations in subsequent quarters.

• Risks to our recommendation and target price include dependence on the foreign direct investment in Malaysia. A change in government policy that is unfavorable to foreign investors will hinder the sales of their units in the industrial park. Failure to meet targeted orderbook replenishment may derail the prospect of earnings growth.

Source: Mplus Research - 26 Nov 2020