Gabungan AQRS’ 2019 results were below expectations. Slow resumption of works on the Light Rail Transit Line 3 (LRT3) project and penalty charges for late delivery of The Peak condominium units depressed 4Q19 earnings. We expect earnings to rebound 46% yoy in 2020E, driven by an acceleration in progress billings for the LRT3 project. But the slow earnings recovery led us to cut 2020-21E core EPS by 22- 28%. We cut our TP to RM1.16, based on the same 20% discount to reduced RNAV. Maintain BUY.

Below Expectations

Net profit of RM39m (-37% yoy) in 2019 was 22% below consensus and our forecast of RM50m. AQRS saw slow progress billings for its construction division due to delays in the resumption of LRT3 works and liquidated ascertained damages (LAD) for The Peak in Johor Bahru amounting to RM6.7m.. Revenue fell 29% yoy to RM413m with both construction (-31% yoy) and property (-16% yoy) divisions generating lower revenue.

Lower Profit Margin

PBT margin eased to 12.2% in 2019 from 14.9% in 2018 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.

Risk of Delays in Wining New Construction Contracts

The award of government contracts could be delayed due to the current political uncertainties. Hence we reduce new contract award assumptions to RM0.5bn in 2020E from RM1.5bn previously. Property sales of RM80m in 2019 came in below its target of RM250m. Given the slow ramp up in progress billings, delay in winning new contracts and low property sales, we cut our 2019-2022E core EPS forecasts by 22-28%.

Reaffirm BUY Call With a Lower TP of RM1.16

We cut our RNAV/share for AQRS to RM1.40 (from RM2.02) to reflect lower construction arm valuation (sustainable earnings assumption reduced to RM40m from RM70m). Based on the same 20% discount to RNAV, we cut our 12-month TP to RM1.16 from RM1.62. Maintain our BUY call. Downside risks: slower order book replenishment and weak property sales.

Slow Award of Contracts Tendered

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.

High Order Book and Unsold Property Stocks

The government’s review of the LRT3 project to cut cost led to slower construction progress billings. But we believe revenue recognition from its property projects, ie, E’Island Lake Haven and The Peak, was low in 2019. High remaining construction order book of RM1.8bn. AQRS is focusing on clearing its Inventories of RM418m at end-2019 and spurring sales of its E’Island project. Net gearing increased to 0.22x at end-2019 compared to 0.16x at end-2018 due to negative operating cash flow of RM46m in 2019. But we believe its financial position will improve as property sales accelerate.

Source: Affin Hwang Research - 2 Mar 2020