• AME’s core earnings jumped 112% qoq to RM11.3m in 2QFY21 as construction activities resumed fully after the Movement Control Order (MCO) was lifted.
• We expect sequential core earnings growth to accelerate in subsequent quarters with new customers purchasing/leasing units in i-Park.
• AME remains one of our top small-cap sector BUYs with target price (TP) of RM2.60, based on a 20% discount to RNAV.

Recovery lagging our expectation

AME’s core earnings of RM16.7m (+37.9 yoy) in 6MFY21 comprises 19% of our fullyear forecast of RM60.1m and 29% of consensus estimate of RM58.1m. Although earnings recovery is lagging our expectation, we expect earnings growth to accelerate in subsequent quarters and believe our earnings forecast is achievable. Revenue was flat yoy at RM175.6m in 6MFY21 as lower construction (-11% yoy) and engineering (-7% yoy) revenue was offset by higher property development (+16% yoy) and investment (+7% yoy) revenue.

Lower profit margin is temporary

Operating profit fell 48% yoy to RM25.7m in 6MFY21, mainly due to lower construction earnings (-81% yoy), while its engineering division incurred a RM3m loss. Construction profit margin fell to 4.1% in 6MFY21 from 18.4% in 6MFY20 as works on a large-scale plant profit is still at the early stages. We gather that margin should improve as the project moves to higher value-added works in 2HFY21. The additional costs incurred due to the MCO disruptions also squeezed profit margins.

Sufficient order book and unbilled sales

Its remaining order book of RM232.4m and unbilled sales of RM74.1m (+20% yoy) should shore up FY21-22E earnings. Remaining gross development value (GDV) of RM2.7bn in 2Q21 will likely sustain its activities over the next 3-5 years.

BUY with potential upside to TP

Discussions with UEM Sunrise to acquire land in industrial land in Iskandar Puteri is ongoing, which we estimate will potentially enhance its RNAV/share by 11% to RM3.61. We reiterate our BUY call with a TP of RM2.60, based on a 20% discount to RNAV. Key downside risks are slower property sales and new contract wins.

Source: Affin Hwang Research - 27 Nov 2020