Gabungan AQRS continues to drive order book expansion to capitalise on the current infrastructure boom. It is in a good position to win contracts for the LRT Line 3 (LRT3) and East Coast Rail Link (ECRL) projects. It is also negotiating with Tera Capital to jointly develop the hotel and service suite components of One Jesselton. We reiterate our BUY call on AQRS with a 12-month RM1.95 target price, based on a 10% discount to the fully diluted end-2018E RNAV.

Expanding Order Book

AQRS’ outstanding order book of RM1.66bn, equivalent to 7.6x FY16 construction revenue, provides high earnings visibility. Not resting on its laurels, AQRS has tendered for a LRT3 package worth c.RM1bn and plans to tender for the Pan Borneo Highway (PBH) Sabah and ECRL packages. It could also secure subcontracts from Syarikat Muhibbah if the latter wins a Bumiputera package for the LRT3 worth RM0.8-0.9bn. AQRS aims to secure RM1.0-1.4bn in new contracts in 2H17 (vs. an earlier target of RM0.7-1.0bn), which could expand its order book to RM3bn by end-2017.

De-gearing Efforts Paying Off

AQRS has been selling its property inventories and non-core assets to reduce its debt, resulting in net gearing reducing to 0.71x in 2Q17 from 0.79x in 2Q16. The cash proceeds from land disposal and reduction in receivables are expected to reduce net gearing to below 0.4x by end-2017. AQRS is negotiating with MRT Corp to collect about RM150m in variation orders and receivables, which will improve its financial position further and reduce interest expense by repaying some of its working capital loans.

Finalising Deal for One Jesselton

AQRS is finalising negotiations with Tera Capital (which holds the Days Inn master franchise for China) to jointly develop the four-star hotel and service suite components of the One Jesselton Waterfront project in Kota Kinabalu. The pricing and deal structure have not been finalised, but the estimated net sales value (NSV) of the two components is RM377m (based on a RM1,300 psf valuation). AQRS may retain a minority stake in the two components to earn recurring income.

Maintain BUY

We assume that the One Jesselton condominium will be launched in 4Q17 and construction works worth about RM849m will start to contribute to earnings in FY18E. Maintain BUY.

Source: Affin Hwang Research - 25 Sept 2017