Back On The Fast Track

Hopes for the ECRL and PBHS mega projects to proceed should reenergise interest in GAQRS. Even without these mega projects, the company trades at a mere 4.9x 2019F basic EPS, driven by construction contracts at hand and property development. Expect sequential quarterly earnings growth in 2018, anchored by a new property launch. Maintain BUY and target price of RM1.86.

WHAT’S NEW

• Optimistic on ECRL and PBHS proceeding. While the newly-installed federal government has not made a final decision on the status of the two projects, there is a good likelihood the East Coast Rail Link (ECRL) project would still proceed as the government would have to compensate China’s CCCC >RM20b for works already done. Gabungan AQRS (GAQRS) remains optimistic that Pan Borneo Highway Sabah (PBHS) would also proceed.
• GAQRS’ targeted subcontracting work scope could be substantially more than earlier indicated. Should these projects proceed, we understand that GAQRS via JVs would be targeting to secure >RM2b of contract works for ECRL as well as PBHS. While the ECRL project value would most likely be significantly scaled down from the previous RM55b, the value reduction reflects mainly lower specifications for rolling stocks. Construction subcontract works available for the local contractors could be bigger as the government has made clear its wishes for more local participation of construction awards.
• Launching highly promising E’Island condo project to sustain growth through 2021. GAQRS plans to launch E’Island Residence development in Puchong, KL in 4Q18. The attractive net pricing (RM350-360 psf) of the RM491m GDV project should ensure the project’s success. E’Island is expected to deliver net profits of RM20m in 2020.
• Improving balance sheet raises ability to reward shareholders. A modest net gearing (0.06x in 1Q18) and expected strong cash flows from property projects create an enviable position for GAQRS to reward shareholders. The two key property projects could yield cumulative net cash flows of >RM500m through 2021, close to GAQRS’ market cap.

STOCK IMPACT

• Expect rising sequential earnings in upcoming quarters for 2018, driven by its ample RM2.7b construction orderbook (2.5x 2018 revenue cover; refer to overleaf RHS table for the orderbook details). Progress for its key jobs are on track, with the LRT3 (the group’s largest project to date) recording a 4.4% progress status despite only securing the job in 4Q17.

Source: UOB Kay Hian Research - 22 Jun 2018