Strong earnings momentum for Gabungan AQRS in 9M17, driven by the surge in construction earnings. Net profit jumped 116% yoy to RM32.8m in 9M17. But earnings is still lagging our RM53.1m forecast in FY17E. We expect better 4Q17 result, boosted by estimated land sale gain of RM6.8m and acceleration in progress billings for its RM2.58bn outstanding order book. Hence, we maintain our earnings forecasts. We reaffirm our BUY call with lifted 12M TP of RM2.16, based on 10% discount to RNAV.

Above Market Expectations

Net profit of RM32.8m (+116% yoy) in 9M17 was above market expectations (89% of consensus full-year forecast of RM36.8m). Revenue surged 31% yoy to RM319m in 9M17, driven by higher revenue for both construction (+45% yoy) and property development (+7% yoy) divisions. PBT saw stronger growth of 69% yoy to RM51m in 9M17, mainly driven by its construction arm (+657% yoy).

Improved Construction Profitability

Construction operating profit margin improved to 12.2% in 9M17 from 4.2% in 9M16, contributed by new projects, eg. SUKE Highway, PR1MA homes in Kuantan and Pahang administration centre. Property PBT fell 83% yoy in 9M17, dragged down by RM6.3m loss in 3Q17. due to weaker sales and high unsold units worth RM580.4m. Unbilled sales of RM145.8m will support property revenue. Overall net profit grew 31% qoq and 83% yoy to RM9.4m in 3Q17.

Strong New Contract Flow

AQRS has secured RM1.14bn worth of new contracts YTD and is on track to achieve its RM1.4bn target in FY17. The new contracts secured excludes the Letter of Intent (LOI) from KotaSAS Sdn Bhd to design and build 1,004 units of landed houses and infrastructure works in KotaSAS, Kuantan, Pahang, for RM189.2m. Outstanding order book of RM2.58bn is equivalent to 11.8x FY16 construction revenue, providing good earnings visibility. Prospects to grow order book is good as it plans to tender for the Pan Borneo Highway Sabah and East Coast Rail Link projects.

Upgrade Target Price

We lift our fully-diluted end-2018E RNAV/share to RM2.40 from RM2.17 on higher construction-arm valuation (increased sustainable construction earnings assumption to RM65m from RM55m given higher order book). Based on the same 10% discount to RNAV, we raise our 12M target price to RM2.16 from RM1.95. Maintain BUY.

Source: Affin Hwang Research - 24 Nov 2017