• AQRS’ 3Q20 results were below market expectations but within ours. It turned around from a net loss of RM74.2m in 2Q20 to a net profit of RM5.0m in 3Q20, mainly due to the absence of impairments and LAD expenses
• Unbilled property sales of RM213m and remaining construction order book of RM1.3bn should sustain its earnings in 4Q20 and 2021
• Execution risks remain for its property development projects. We reiterate our HOLD call and TP of RM0.77, based on 20% discount to RNAV

Offset earlier losses in 3Q20

Headline net loss of RM65.3m in 9M20 was mainly due to operational losses incurred during the Movement Control Order (MCO) period, provision for liquidated ascertained damages (LAD) for The Peak condominium project, impairment of property inventories and the PPSAS construction projects recognised in 2Q20. Revenue fell 68% yoy to RM108m in 9M20, mainly due to the negative revenue recognised in 2Q20. Core net profit was RM4.4m in 9M20, down 87% yoy from RM33.1m in 9M19 as its operations were adversely affected by the sales gallery and site closures during the MCO period. AQRS seems on track to achieve our core net profit of RM11.3m in 2020E but may fall short of consensus forecast of RM17.7m.

Pick-up in property sales

AQRS achieved property sales of RM270.6m for YTD 17 November 2020. In addition, RM92.3m of bookings are in the process of being converted into sales. Average take-up rate was 27.6% across its major projects, ie, E’Island Lake Haven and The Peak. The completion of negotiations to re-measure the contract value for the GS04 Light Rail Transit Line 3 (LRT3) package to RM709.8m removes the uncertainties surrounding this project, which is the largest in its remaining RM1.3bn order book. Good prospects for AQRS to bid for the Pan Borneo Highway Sabah and East Coast Rail Link packages to grow its order book.

Slow earnings recovery

We believe AQRS will see a slow earnings recovery back to the peak level in 2018. PER of 13x in 2021E looks undemanding but earnings forecast risks remain high due to the current Conditional MCO, which could impact property sales and construction project execution. Maintain our HOLD call with TP of RM0.77, based on 20% discount to RNAV. Key upside/downside risks are higher/lower property sales and new contract wins, faster/slower progress billings for ongoing projects.

Source: Affin Hwang Research - 27 Nov 2020