Gabungan AQRS reported net profit of RM63.6m (-6% yoy) in 2018, which was within market and our expectations. Core net profit surged 113% yoy to RMM69.8m, driven by strong construction progress billings. Its high remaining order book of RM2.2bn and turnaround of its property division will support core EPS growth of 12% yoy in 2019E. We cut our core EPS forecasts by 24-25%, mainly to adjust for the enlarged share base from the exercise of warrants and slower construction progress billings. AQRS is one of our top small-cap sector BUYs.

Within Expectations

AQRS’ net profit of RM63.6m in 2018 was close to consensus forecast of RM66.2m and our estimate of RM61.6m. Revenue jumped 25% yoy to 582.5m in 2018, driven by construction revenue growth of 55% yoy while property revenue contracted 75% yoy. There was higher progress billings for ongoing construction projects such as Pusat Pentadbiran Sultan Ahmad Shah (PPSAS) and Sungai Besi-Ulu Kelang Expressway (SUKE), while works on the Light Rail Transit Line 3 (LRT3) project slowed due to the review by the government to reduce cost.

Property LAD Provision

PBT declined 16% yoy to RM87.3m in 2018, mainly due to net exceptional loss of RM6.2m compared to gain of RM34.7m. AQRS charged RM14.6m for Liquidated Ascertained Damages (LAD) for its The Peak condominium project in Johor Bahru due to delays in completion and delivery of units to buyers. This was partly reduced by an RM8m reversal of impairments. A lower effective tax rate led to a lower decline in net profit of 6% yoy in 2018. Core net profit growth more than doubled to RM69.8m. As the net exceptional loss was charged in 4Q18, net profit declined 36% qoq and 68% yoy to RM11m.

Maintain BUY With Lower TP of RM1.60

AQRS is targeting to secure RM1.5bn worth of new contracts in 2019 to grow its remaining order book of RM2.2bn, equivalent to 4x 2018 construction revenue. It is targeting RM0.5bn property sales in 2019 from its E’Island Lake Haven project in Puchong and relaunch of The Peak. We reduce our RNAV/share to RM2.60 from RM2.66 previously to reflect the higher net debt and dilution from new shares issued for the exercise of warrants before expiry last year. Based on the same 30% discount to RNAV, we reduce our TP to RM1.60 from RM1.64 previously. Current 2019E PER of 8x is attractive considering a 3-year EPS CAGR of 17%. Maintain our BUY call. Key risk is slower order book replenishment.

Source: Affin Hwang Research - 1 Mar 2019