Highlights

Strong Growth… AQRS’s FY13 earnings is expected to more than double to RM59.7m, representing an earnings growth of >150%. Thereafter, it is sustainable at low teens which provide 3-year earnings CAGR of 56%. Consequently, its P/E valuation is expected to compress from 26.6x to 9.7x (FD P/E: 14.0x), which is attractive vis-àvis its industry peers which is trading at 11-15x. We believe that AQRS is on a similar path with Kimlun, which had seen its share price successful rerated upwards following its successful maiden property venture which will support higher earnings base.

Final accounts, additional support … There is RM37.6m worth of projects due for profit recognition upon finalisation of its accounts. Assuming a net profit margin of 15%, profits from these projects translate to RM5.6m, which already makes up a quarter of FY12’s earnings.

Continuity from property earnings stream… Going forward into FY14-15, AQRS still has an effective GDV of RM2.1bn yet to be launched, which translates to 41.4x FY12’s property revenue. Based on our estimates, it is sizable enough to sustain earnings growth for the property division until 2016. Its unbilled property sales of RM202.7m translates to a run rate of 4.1x FY12’s property revenue.

Construction support… Although we are estimating strong growth for the construction division, it will complement the property division and we are favourable on the integrated construction-property business model. The division has an external outstanding order book of RM525.1m, which translates to 1.9x FY12’s construction revenue.

Catalysts

Positive: (1) High take-up rates from new property launches; (2) New contract wins; (3) Strategic landbanking exercise.

Negatives: (1) Tightening policy by Bank Negara.

Risks

1) Unexpected downturn in the construction/property sector; 2) Execution risk; 3) Rising raw material prices; and 4) Regulatory and political risk.

Forecasts

Strong FY13 earnings growth of 176%, followed by moderate earnings growth of 29.3% and 5.2% for FY14 and FY15 respectively.

Decent yield of 2.6% at the current share price based on 25% payout ratio.

Rating

Not rated.

Valuation

We value AQRS based on SOP method by assigning 12x P/E multiple to its construction division while using RNAV to value its property division. Hence, this works out to RM2.11, implying a total upside potential of 32.8% (including dividend yield of 2.6%).

Source: Hong Leong Investment Bank Research- 19 Jul 2013