3Q19: Slow Ramp Up

Gabungan AQRS’ 3Q19 results were below expectations. Slow earnings ramp up as the resumption of high-value works on the Light Rail Transit Line 3 (LRT3) will only start in December 2019. The relaunch of the property division generated RM136m bookings up to 27 November 2019. Given the delay in winning new contracts and slow ramp up of LRT3 works, we cut our core 2019-22E EPS forecasts by 31-36%. 2020E PER of 9x is attractive. AQRS remains our top sector BUY with reduced target price of RM1.62, based on 20% discount to RNAV.

Below Expectations

Net profit of RM33m (-34% yoy) in 9M19 comprised only 49-53% of market consensus and our FY19 forecasts of RM63-68m. AQRS saw slow progress billings for its construction division due to lower contribution from the LRT3 project. Revenue fell 30% yoy to RM333m with both construction (-28% yoy) and property (-60% yoy) divisions generating lower revenue.

Lower Profit Margin

PBT margin eased to 13.8% in 9M19 from 15.0% in 9M18 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 RM46m in 9M19.

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. However, the award of packages for the 2 projects have been slow. Prospects are good for AQRS to win new contracts and maintained its target of RM1.5bn in 2019. Property sales in 9M19 is lagging its target property sales of RM250m in 2019. Given the slow ramp up in progress billings and delay in winning new contracts, we cut our core 2019-2022E EPS forecasts by 31-36%.

Reaffirm BUY Call With a Lower TP of RM1.65

We cut our RNAV/share for AQRS to RM2.02 (from RM2.28) to reflect lower construction arm valuation (sustainable earnings assumption reduced to RM70m from RM80m) and higher net debt in 3Q19. Based on the same 20% discount to RNAV, we cut our 12-month TP to RM1.62 from RM1.82. Maintain our BUY call. Downside risks: slower order book replenishment and weak property sales.

Source: Affin Hwang Research - 2 Dec 2019