Gabungan AQRS’s net profit of RM16.1m (+330% yoy) in 1Q17 was above our expectations. Gains (after tax) of about RM11.8m from the disposal of land in Dengkil and Kinrara Uptown lifted earnings in 1Q17. We expect the sale of land in Kota Damansara to contribute gains of RM11.7m in 2H17. We raise our FY17 EPS forecast by 53% to reflect the land-sale gains. Maintain BUY with higher RM1.62 target.

Land-sale Gains Recognised

Revenue rose strongly by 100% yoy and 85% qoq to RM159m in 1Q17, mainly on higher property-development revenue from the sale of two land parcels. PBT rose 91% qoq and 4x yoy to RM26m on land-sale gains. The earnings contribution from new contracts worth RM1.5bn secured last year led to a construction PBT of RM8.6m in 1Q17 compared to a loss of RM2.1m in 1Q16. The property development PBT increased 139% yoy to RM16.7m in 1Q17 with the sale of The Contours Courtyard Villas and land in Dengkil to PR1MA and Kinrara Uptown to Ara Indah Development.

High Construction Orderbook

We expect AQRS’s construction orderbook of RM1.7bn and unbilled sales of RM145m to contribute to earnings in FY17-19. It is also pushing to sell RM591m of unsold units, mostly for The Peak condominium in Johor Bahru. Orderbook growth prospects look good, as AQRS is pre-qualified to bid for LRT Line 3 packages and plans to tender for the Pan Borneo Highway (PBH) Sabah and East Coast Rail Link packages. It aims to secure RM0.7-1.0bn of new contracts in 2017. Its One Jesselton project with a gross development value of RM1.8bn is due to launch in late 2017.

Raising Earnings Forecasts

We increase our FY17E EPS by 53% to reflect the land-sale gains. We also raise our FY18-19E EPS by 5-6% to factor in interest savings from debt repayment with land-sale proceeds and potential earnings from its 49%-owned pre-cast concrete manufacturing operation in Sabah, assuming it secures a supply contract worth RM800m for the PBH Sabah project which could contribute a PBT margin of 12% over 7 years.

Share-price Correction a Buying Opportunity, in Our View

We lift our fully diluted end-2017E RNAV/share to RM1.80 from RM1.37 on lower net debt, higher construction-arm valuation and a new valuation for the pre-cast concrete division. Based on the same 10% discount to RNAV, we raise our 12M target price to RM1.62 from RM1.24. Maintain BUY.

Source: Affin Hwang Research - 23 May 2017