Gabungan AQRS reported weak 1Q19 results. But, we deem the results within our expectations as we look for stronger 2H19 earnings. Net profit fell 32% yoy to RM11.3m in 1Q19 due to lower revenue. Progress billings for the Light Rail Transit Line 3 (LRT3) project slowed due to the government’s review of the project to reduce costs. We lift our TP to RM1.65 from RM1.60, as we roll over the valuation basis for our RNAV to 2020E. We reaffirm our BUY call.

Within Expectations

AQRS’ net profit of RM11.3m in 1Q19 comprised only 13-14% of market consensus and our forecasts of RM80-86m in 2019E. Revenue fell 32% yoy and 22% qoq to RM86m in 1Q19, mainly due to lower construction revenue. Progress billings for its LRT3 project were lower due to the government’s review of the project to reduce costs. Net profit fell 32% yoy and 4% qoq in 1Q19, mainly due to the lower revenue. AQRS’s tight cost control mitigated the impact of the lower revenue on the bottom line.

Lower Construction Earnings

Construction operating profit fell 69% yoy and 78% qoq to RM7.5m, mainly due to lower revenue on slower progress billings on the LRT3 project. Its construction earnings came mainly from the SUKE expressway and Pahang administration centre projects. Its property division turned around to report an operating profit of RM4m in 1Q19 compared to losses of RM18.9m in 4Q18 and RM1.4m in 1Q18. Lower interest expense and the absence of impairment losses led to the property division returning to the black.

Good Prospects to Replenish the Order Book

Prospects to replenish the remaining order book of RM2.4bn look good as management targets to secure RM1.5bn in new contracts by bidding on East Coast Rail Link subcontracts and Pan Borneo Highway Sabah packages along with its partner Suria Capital. AQRS launched its E’Island Lake Haven development project in Puchong (24 April 2019) and relaunched The Peak in Johor Bahru (30 March 2019) to drive property earnings growth in 2019-22.

Reaffirm BUY Call With a Higher TP of RM1.65

We lift our RNAV/sh for AQRS to RM2.35 (from RM2.31) after rolling over our valuation basis to 2020E. Using the same 30% RNAV discount, we lift our 12- month TP to RM1.65 from RM1.60 previously. AQRS remains one of our top construction sector picks. Downside risk: slower order book replenishment.

Source: Affin Hwang Research - 21 May 2019