Gabungan AQRS’ 2Q19 results remained weak with the property division, incurring a net loss of RM1.6m. Weak property sales and the slow progress billings on the Light Rail Transit Line 3 (LRT3) project contributed to the 39% yoy drop in 1H19 net profit to RM22m. We cut our core EPS by 5-13% in 2019-22E. We expect earnings growth to accelerate in 2H19 and new contract wins to expand its order book in 2H19. AQRS remains our top sector BUY with reduced target price of RM1.82, based on 20% discount to RNAV.

Below Expectations

Net profit of RM22m (-39% yoy) in 1H19 comprised only 28-29% of market consensus and our FY19 forecasts of RM75-78m. We were surprised by the slow progress billings for its construction division and weak property sales. Revenue fell 32% yoy to RM214m with both construction (-30% yoy) and property (-52% yoy) divisions generating lower revenue. The government review of the LRT3 project to cut cost led to slower construction progress billings, while the launch of its E’Island Lake Haven condominium project in April saw weak maiden sales (about 25% take-up rate).

Lower Profit Margin

PBT margin ease to 13.8% in 1H19 from 15.6% in 1H18 as its high-margin KotaSAS project is at the tail end, while AQRS is incurring high promotion cost to market its new (E’Island) and relaunched (The Peak) properties. Hence, PBT saw a sharper 40% yoy decline to RM30m in 1H19.

Good Prospects to Replenish the Order Book

AQRS has submitted tenders for East Coast Rail Link subcontracts and Pan Borneo Highway Sabah packages along with its partner Suria Capital. AQRS. Prospects are good for AQRS to win new contracts and it maintains target of RM1.5bn in 2019. AQRS maintains target property sales at RM250m in 2019 and introduce a new target of RM300m in 2020.

Reaffirm BUY Call With a Lower TP of RM1.82

We cut our RNAV/share for AQRS to RM2.56 (from RM2.66) to reflect lower property arm valuation, higher net debt in 2Q19 and dilution from new shares issued as dividends. Based on the same 20% discount to RNAV, we cut our TP to RM1.82 from RM1.88. Maintain our BUY call.. Downside risk: slower order book replenishment.

Source: Affin Hwang Research - 23 Aug 2019