Gabungan AQRS’ 9M18 result was within market expectations but above our expectation. Net profit jumped 60% yoy to RM52.6m in 9M18, driven by higher progress billings and profitability for its construction division. Its remaining order book of RM2.4bn will sustain earnings growth. However, potential buyer compensation provisions for The Peak project could reduce earnings in 4Q18. We raise our core EPS by 5-16% in FY18-20E to reflect higher construction profit margin and lower dilution impact from the new warrants. We reiterate our BUY call with lifted RM1.64 TP, based on 30% discount to RNAV.

Above Expectation

AQRS reported net profit of RM52.6m in 9M18 comprises 73% of consensus full-year forecast of RM71.9m and 85% of previous estimate of RM62.3m. Revenue jumped 48% yoy to RM474m in 9M18 on higher construction revenue (+102% yoy), partly offset by lower property development revenue (-62% yoy). PBT jumped 40% yoy to RM71.2m in 9M18, mainly driven by higher construction PBT (+55% yoy) and lower net interest expense while its property division incurred a loss of RM6m. Net profit was up 60% yoy with lower effective tax rate. Excluding the one-off land sale gains in 9M17, core net profit jumped 168% yoy to RM52.3m.

Sustained by High Order Book

AQRS’ high remaining order book of RM2.4bn comprising the SUKE, KotaSAS and LRT Line 3 (LRT3) projects will sustain construction earnings growth. AQRS targets to secure another RM1.5bn worth of new contracts but has extended the timeline to mid-2019 from end-2018 due to the government’s review of infrastructure projects.

Raise Earnings

We upgrade core EPS by 5-16% in FY18-20E to reflect better construction PBT margins and lower dilutive impact from the new free Warrant B issued, while most of the Warrant A outstanding that expired this year were not exercised. Construction PBT margin was high at 16.8% in 9M18 as its projects move to more advance stage of construction.

Upgrade to BUY

We reiterate our BUY call on AQRS with TP raised to RM1.64 from RM1.60, based on the same 30% discount on lifted RNAV/share of RM2.35 from RM2.30. Key risk is slower order book replenishment and execution.

Source: Affin Hwang Research - 19 Oct 2018