Gabungan AQRS’ 1Q20 results were below market and our expectations. Net profit fell 65% yoy and 27% qoq to RM3.9m in 1Q20. Its efforts to pursue an asset-light model and cost rationalisation helped the group stay in the black despite COVID-19. We cut our core 2020-22E EPS by 4- 38% to reflect slower progress billings and weaker profit margins. We assume a slow recovery as operations have restarted since May after the easing of restrictions under the government’s MCO. We maintain our HOLD call with a lower TP of RM0.92, based on a 20% discount to RNAV.

Below Expectations

Net profit of RM3.9m (-65% yoy) in 1Q20 was just 8% of consensus full-year forecasts of RM48.5m and 10% of our prior estimate of RM38.8m. Slow progress billings for construction and property due to the Movement Control Order (MCO) adversely impacted profitability. This should linger in 2Q20 as its construction operations only resumed in early May, while property construction works restarted in late-June as strict town council requirements had to be met for its E’Island project before the site could reopen.

Lower Profit Margin

Revenue fell 11% yoy and 4% qoq to RM77m in 1Q20 due to lower property contribution (lower work progress for The Peak project), partly offset by higher construction revenue (+5% yoy and +2% qoq). PBT margin eased to 7.8% in 1Q20 from 14.8% in 1Q19 as its high-margin KotaSAS project was at the tail end, while its operations were disrupted by the COVID-19 pandemic and MCO. Hence, PBT saw a sharp 53% yoy decline to RM6m in 1Q20.

High Order Book Likely to Sustain Operations

Construction order book of c.RM1.63bn (incl. RM37m East Coast Rail Link contract secured on 3 June 2020) and remaining property gross development value of RM1.1bn at end-1Q20 will likely sustain its operations up to 2023-24. It secured property sales of RM95.6m and bookings of RM34.1m since the relaunch of the division in 2019.

Maintain Our HOLD Call

We cut our RNAV/share for AQRS to RM1.14 (from RM1.25) to reflect a lower construction arm valuation (sustainable earnings assumption cut to RM25m from RM40m previously). Applying an unchanged 20% discount to RNAV, we lower our 12-month TP to RM0.92 from RM1.00 and maintain our HOLD call. Upside/downside risks: higher/lower progress billings of ongoing projects.

Source: Affin Hwang Research - 29 Jun 2020