We gather that Gabungan AQRS is pursuing a multi-billion Ringgit subcontract package for the East Coast Rail Link (ECRL) project. It is exploring a tie up with a potential partner to bid for the project. It has also submitted RM2.2bn worth of tenders for the Pan Borneo Highway (PBH) Sabah together with Suria Capital. AQRS launched properties with net gross development value (GDV) of RM940m in 2Q19 to drive long-term earnings and FCF growth. AQRS is one of our top market and sector BUYs with lifted target price (TP) of RM1.88, based on 20% discount to RNAV.

Potential ECRL Beneficiary

We gather that AQRS is looking to tie-up with a large Bumiputera contractor to bid for ECRL subcontract works. Finding a Bumiputera partner with a large balance sheet will allow the joint venture to bid for a multi-billion Ringgit subcontract under the Bumiputera category, which is less competitive due to preferential treatment and fewer bidders. AQRS’ cost advantage is its established construction operation in KotaSAS, which will have an ECRL station, and it has access to quarry stone supplies in Pahang.

Launched Property Projects

AQRS launched the E’Island Residence affordable condominium and relaunched The Peak condominium in 2Q19. AQRS achieved bookings of RM75m in 1H19, mostly for its E’island project. Take-up rate remains low due to weak property market conditions. Bank borrowings to finance both property projects are low and hence it is able to weather the weak demand and offer a rent-to-own scheme for The Peak.

Trimmed Earnings Forecasts

AQRS has good prospects to grow its remaining order book of RM1.96bn, equivalent to 3.6x FY18 construction revenue. We assume it will secure RM1.5bn worth of new contracts in 2019E and RM1bn p.a. in 2020-21E. But we cut our core EPS by 3-5% in 2019-21E to reflect slower new contract awards and dilutive impact from the exercise of warrants.

Raised Target Price

We raise our TP to RM1.88 from RM1.65 by narrowing the discount to RNAV to 20% from 30% previously. With the launch of new property projects, the monetisation of its land bank is closer at hand and hence we believe it is unjustified to give zero value to its property arm in our previous TP. AQRS is our top sector BUY given attractive valuations and a potential ECRL project beneficiary. Downside risk: slower order book replenishment.

Source: Affin Hwang Research - 12 Jul 2019