• AQRS incurred a surprise net loss of RM70.2m in 6M20, mainly due to impairments on inventories and a construction project, as well as provisions.
• Core net loss was RM4.6m in 2Q20 and RM0.6m in 6M20 as its operations were adversely impacted by the government’s Movement Control Order.
• We revise our core EPS lower by 4-53% in 2020-22E as we expect slower construction progress billings. We reiterate our HOLD call with a lower target price of RM0.77, based on 20% discount to reduced RNAV.

Impairments and Provisions Hit Bottom Line

AQRS recognised impairment on property inventories of RM19.3m, impairment on a construction project of RM33.3m and provision for liquidated ascertained damages (LAD) of RM17.0m for The Peak project. These one-off items impacted both its revenue and bottom line, resulting in a net loss of RM70.2m in 6M20. We understand that AQRS is being prudent given the adverse impact of the Covid-19 pandemic on its operations and tough business conditions due to the economic recession.

Change in Construction Contracts

We expect a lower contract value for its Klang Valley LRT Line 3 (LRT3) project on completion of negotiations with the main contractor and slower progress billings for its KotaSAS administration centre project due to design changes. We gather that AQRS is focusing on disposing its completed units for its Contours, The Peak and Permas Centro projects to raise cash. AQRS achieved sales of RM110.6m since reviving its property development division in April 2019 with most of the sales coming from its E’Island Lake Haven project (92% of total). Its remaining construction order book of RM1.3bn and property unbilled sales of RM157.5m should support earnings in 2020- 22E. Its key focus is to generate positive cash flow and ride through the current downturn with low gearing (net gearing of 0.27x at end-June).

Remain Cautious on the Stock

We believe earnings forecast risks remain high due to the slow recovery expected for the group’s operations in view of the weak property market. We cut our RNAV/share estimate to RM0.96 from RM1.15 previously to reflect lower valuation for its construction division after reducing our sustainable annual earnings assumption to RM20m from RM30m. Based on the same 20% discount to RNAV, we cut our TP to RM0.77 from RM0.92 previously. Maintain our HOLD call. Key upside/downside risks are higher/lower progress billings, higher/lower property sales and higher/lower operating profits margins.

Source: Affin Hwang Research - 1 Sept 2020