We came away from the recent briefing feeling upbeat about GAQRS’ future transformation plan for its property arm, which aims to transform the division into a high cash-generating and high dividend-paying division for 2019-23. Maintain BUY with target price of RM1.86.

WHAT’S NEW

Game changer for property arm. Gabungan AQRS’ (GAQRS) has laid out its five-year transformation plan to resuscitate its property division, which is expected to contribute considerable earnings to the group in the coming years. To recall, its construction arm delivers >90% of the company’s earnings. The plans for its property arm include relaunching its existing high-rise condominium project, The Peak, as well as a soft launch of its new affordable apartments, E’Island Residence.

STOCK IMPACT

Re-launching maiden property project in Johor. It is common market knowledge that The Peak project (current take-up rate 30%) would be relaunched in 3Q18 upon completion, with embedded greater value for its secured and potential buyers such as builtin cabinets (by Signature Kitchen), air-conditioning, etc. GAQRS remains positive on this project largely due to; a) its close proximity to city centre with good connectivity to major highways (EDL) and interchanges, b) new high-rise property developments in Johor Bahru have been temporarily put on hold, and c) GAQRS will appoint a third-party renowned property agent to market The Peak project for the overseas market. Also, this project is grandfathered from the minimum purchase price requirement of RM1m for foreigners, which will result in better sales.

E’Island Residence is gaining further momentum. The E’Island project has received encouraging response, with almost 400 buyers (comprising a balanced mix of Bumiputera and non-Bumiputera) having registered their interest before its official launch. The 1,140- unit semi-furnished affordable apartment ranges between RM350,000-495,00/unit (80% of the total number of units have an average price range of RM350,000-370,000/unit), and is expected to be launched in 3Q18. The RM491m project sits on 19 acres of land, located in Puchong with multiple major highways connectivity.

One Jesselton Waterfront Kinabalu development remains intact. The development of RM1.7b One Jesselton project is expected to commence in 4Q18. We understand GAQRS is currently in talks with potential investors to invest in GAQRS-formed special purpose vehicles (SPV) to fund its mall, hotel and serviced suites development.

Turning into a strong net cash company. We expect GAQRS’s future balance sheet and operating cash flow to strengthen significantly on the back of its 5-year transformation plan. Based on our conservative estimates, we project its operating cashflow from The Peak and E’ Island projects to contribute at least RM350m and RM100m respectively during the 5-year timeframe.

Rewarding shareholders. The transformation plan for its property division will turn the company into a high cash-generating and high dividend-paying division for 2019-23, and there could be potential upside to earnings and dividends should it secure mega construction projects. The company has guided that the retained earnings from The Peak project will be distributed to shareholders in the form of dividends, while retained earnings from E’Island will be used for the company’s working capital.

Appealing dividend payment for shareholders. The steady anticipated cashflow from the property division’s transformation plan is sufficient to reward its shareholders with an alluring dividend payment of 10sen/share for 2019-23, with potential upside assuming GAQRS decides to distribute profit from the construction’s division to its shareholders.

LRT3 scale-down to impact GAQRS’ construction earnings. GAQRS’ earnings will be affected as its LRT3 contract value will be reduced by RM100m due to the cancellation of one out of three stations (Temasya), while the completion date will also be delayed to 2024 (from 2020). We expect earnings to be reduced by 12%, 10% and 2% respectively for 2018- 20 following the proposed LRT3 scale-down and deferment. The earnings contribution from LRT3 project alone will account for around 35% of GAQRS’ full-year earnings for 2018.

To secure new potential projects for construction arm. The company remains positive of securing contracts worth RM1.5b in 2018, largely from mega projects such as ECRL, Pan Borneo Highway Sabah and others. To date, GAQRS’ external outstanding orderbook stands at RM2.3b while new job wins secured stand at RM60m.

EARNINGS REVISION/RISK

We maintain our earnings forecasts for 2018-20. While we acknowledge there will be potential downside in earnings in 2018-20F from the extension of the LRT3 construction period, we believe GAQRS’ earnings downside could be partially offset/mitigated by: a) securing new job wins, with value higher than our assumption, and b) better-than-expected progress billings recognition (aside from the LRT3 project).

Risks include: a) execution risk, b) political risk, and c) fluctuation of prices for raw materials.

VALUATION/RECOMMENDATION

Maintain BUY with 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 GAQRS 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 - 16 Jul 2018