We upgrade our call on Gabungan AQRS to BUY from Hold with a higher target price of RM2.25, based on a 10% discount to RNAV. The share price has corrected 14% from the high of RM2.14 on 8 January 2018. We see good prospects to grow its current order book of RM2.9bn. Net gearing improved to 0.11x at end-2017 following the RM78m cash received for its MRT1 approved variation order (VO) claims. However, we cut FY18-19E EPS by 3-6% to reflect the weak sales for The Peak project.

Good New Contract Prospects

AQRS is bidding for the East Coast Rail Link (ECRL), federal government projects in Kota SAS, and the Pan Borneo Highway (PBH) Sabah work packages. We believe prospects are good for AQRS to win the contracts, given its (1) established construction operation in Kota SAS, Pahang, which the ECRL runs through; and (2) partnership with Suria Capital, which is a majority-owned listed entity of the Sabah state government, to bid for the PBH Sabah packages. It is targeting to secure RM1.5bn in new contracts in 1H18. We assume in our earnings forecasts that AQRS will clinch RM2bn worth of new contracts in FY18 and RM1bn p.a. in FY19-20.

MRT1 Claims Approved

AQRS received RM78m from MRT Corp for some of its VO claims in 4Q17, which relates to works completed for the RM523m Klang Valley MRT Line 1 (MRT1) Package V1 project (completed on 29 September 2016). PAT of RM33.3m was recognised in 4Q17, offsetting the RM12.2m liquidated ascertained damages (LAD) for The Peak condominium project and RM17.5m write-down for the Altium development cost.

Lower Net Gearing

The improved working capital management, land sale proceeds and MRT1 VO claims reduced its net gearing to 0.11x at end-FY17 from 0.67x at endFY16. We gather that potential VO claims of RM20m for the MRT1 project and improved operating cash flow could see AQRS turn net cash positive in 1Q18.

Upgrade to BUY

We lift our RNAV/share to RM2.50 from RM2.40 to reflect lower net debt as at end-FY17 and our DCF valuation for its Petronas Chemical basecamp in Sipitang. Based on the same 10% discount to RNAV, we lift our TP to RM2.25 from RM2.14. We upgrade our call to BUY from Hold.

Source: Affin Hwang Research - 6 Mar 2018