GAQRS’ 1H18 net profit of RM35.8m accounted for 43% of our full-year estimate. We expect stronger earnings growth in 2H18 on accelerated progress billings from mega projects like SUKE, PPSAS and LRT3. Maintain BUY. Target price: RM1.86.

RESULTS

Earnings within expectations. Gabungan AQRS (GAQRS) reported a 1H18 net profit of RM35.8m (+42% yoy) on the back of higher progress billing recognition from key projects like SUKE (expressway), PPSAS (state administration centre) and LRT3 which boosted 1H18 revenue to RM314.7m (+32% yoy). Meanwhile, 1H18 PATAMI accounts for 43% and 50% of our and consensus’ full-year earnings forecasts respectively, which we deem in line as we expect stronger earnings in the following quarters on accelerated progress billings recognition.

Healthy balance sheet. 2Q18 net gearing marginally inched up to 0.12x from 0.07x in 1Q18 due to a share repurchase exercise in 2Q18. Coupled with strong operating cash flow and healthy cash balance of RM137.9 (>23 sen/share), we expect GAQRS to be in a net cash position by the year-end, thanks to profits that it is poised to recognise from ongoing construction jobs.

Construction division accounts for >95% of company’s earnings. The construction division reported revenue of RM165.7m (+51% qoq, +115% yoy) and PBT of RM22.1m (- 8% qoq, +37% yoy) respectively in 2Q18, underpinned by higher progress billings recognition while margins have normalised in 2Q18 (in line with our estimates). Key projects that contributed to earnings in 2Q18 were Pusat Pentadbiran Sultan Ahmad Shah (PPSAS), Sungai Besi Ulu Kelang Expressway (SUKE) and LRT3.

Property division to pick up from 2018 onwards. The property development division reported revenue of RM18.6m (+26% qoq, >100% yoy) and a PBT of RM0.6m for the quarter due to construction progress for The Peak project. We expect sales to pick up (current take up rate: 30%) once a relaunch is undertaken in Jun 18 for The Peak which is GAQRS’ only ongoing development. In addition, GAQRS will be launching a new project, E’Island Residence in 2H18, comprising 1,140 units of semi-furnished affordable apartments ranging RM280,000-495,000/unit with a total GDV of RM491m.

STOCK IMPACT

Optimistic on ECRL and Sabah PBH progress. Although the Malaysia Rail Link (MRL) issued a temporary stop work order to the main contractor China Communications Construction Co (CCCC) recently, we believe this is to facilitate negotiations between the involved parties and is expected to proceed subject to better contract terms agreed to, such as: a) lower construction cost, and b) better direct and indirect participation of Malaysian companies, and c) an additional RM20b on top of what has been paid. Meanwhile, GAQRS remains optimistic that Sabah PBH works would also proceed and it would to secure at least one of its work packages.

Core earnings driven by construction arm. As at 30 Jun 18, construction orderbook stood at RM2.5b (2.3x 2018F revenue). Progress for key jobs are on track, with the LRT3 (the group’s largest project to-date) recording a 10.3% progress status. Earthworks for the PRIMA Gambang project have also been completed and building structure works are expected to commence soon. GAQRS has submitted the tender for ECRL and believes it stands a good chance of securing part of the construction jobs, given its track record and strong relationship with the government in Pahang where most of the ECRL alignment would be located.

Targeting to become key supplier of precast products for Sabah PBH. AQRS is participating in biddings for this job for two different roles: a) contractor for part of the highway, and b) supplier of precast manufacturing products. We are optimistic about its ability to secure the Sabah PBH project, given that its Sabahan partner, Suria Capital Holdings, is one of the Sabah state’s key investment vehicles. GAQRS estimates that the value of precast required for the Sabah PBH is about RM2b.

Soft launch of new property project in 3Q18. GAQRS will be launching the E’Island Residence in 2H18, comprising 1,140 units of semi-furnished affordable apartments ranging from RM280,000 to RM495,000/unit with a total GDV of RM491m. 80% of the products are priced at an average of RM350,000-370,000/unit. It sits on 19 acres of land, located in Puchong with multiple major highways connectivity.

EARNINGS REVISION/RISK

We maintain our earnings forecasts for 2018-20. While we acknowledge there will be potential downside to earnings in 2018-20 from the deferment of the LRT3 construction, we believe GAQRS’ earnings downside could be partially mitigated by: a) securing new job wins; and b) better-than-expected progress billings recognition (aside from LRT3 project). However, if everything else remains status quo, GAQRS’ earnings could drop 12%, 10% and 2% in 2018-20 respectively from the deferment of LRT3 construction.

Risks include: a) execution risk, b) political risks, and c) raw material price fluctuation.

VALUATION/RECOMMENDATION

Maintain BUY with a target price of RM1.86, based on 10x 2019F fully-diluted EPS of 18.6 sen as small-mid caps de-rate to reflect tighter market liquidity. Key catalysts for the stock would be new large construction orders in 2H18. We like AQRS for its: a) superior orderbook cover, b) strong position which will enable it to secure new jobs, and c) anticipated strong earnings growth.

Source: UOB Kay Hian Research - 13 Jul 2018