Gabungan AQRS’s net profit of RM23.4m (+134% yoy) in 1H17 was above market expectation but below ours. We were surprised by the property losses in 2Q17 and high effective tax rate, which led us to cut EPS by 15% in FY17E. But we raise EPS by 5-8% in FY18-19E assuming higher new contracts secured, partly offset by dilutive impact from the recent private placement of new shares. Good prospect to expand order book and the launch of One Jesselton in 4Q17 will drive a property turnaround. We maintain our BUY call with a higher target price of RM1.95, based on 10% discount to RNAV.

Below Our Expectation But Above Street

AQRS’s net profit of RM23.4m in 1H17 comprise 59% of consensus fullyear net profit forecast of RM40m but only 38% of our previous estimate of RM61.7m. Revenue jumped 37% yoy to RM239m, driven by higher construction revenue. PBT jumped by a higher 65% yoy to RM36m due to higher profit margin for construction division and land sale gains. PAT of RM23.4m (+134% yoy) includes net gain of RM15.1m from land sales completed in 1Q17. Net profit declined 55% qoq to RM7.2m in 2Q17 due to the absence of land sale gains and property development loss.

Good Earnings Visibility

Progress billing on new contracts worth RM1.4bn secured last year, ie, SUKE expressway, PR1MA homes in Kuantan, Pahang administration centre, spurred the 58% yoy jump in construction revenue. We expect AQRS’s construction orderbook of RM1.66bn and unbilled sales of RM141m to contribute to earnings in FY17-19. There are unsold units worth RM585m, mostly for The Peak condominium in Johor Bahru.

Potential New Projects in 2H17

AQRS has tendered for a LRT Line 3 package worth about RM1bn and plans to tender for the Pan Borneo Highway (PBH) Sabah and East Coast Rail Link packages. It could also secure subcontracts from Syarikat Muhibbah if the latter wins a Bumiputera package worth RM0.8-0.9bn. It aims to secure RM1.0-1.4bn of new contracts in 2H17, against an earlier target of RM0.7-1.0bn.

Upgrade Target Price

We upgrade our EPS forecasts by 5-8% in FY18-19E to reflect higher new contract assumptions of RM1.4bn in FY18E (RM0.82bn previously) and RM2bn in FY19E (RM0.8bn previously). We lift our fully-diluted end-2018E RNAV/share to RM2.16 from RM1.80 on higher construction-arm valuation and rolling forward our DCF base year. Based on the same 10% discount to RNAV, we raise our 12M target price to RM1.95 from RM1.62. BUY.

Source: Affin Hwang Research - 25 Aug 2017