Investment Highlights

• We initiate coverage on AME Elite Consortium Bhd (AME) with a BUY call and target price of RM2.14. We opine that this under-researched company deserves to be re-rated in view of its: 1) Bright outlook to benefit from prolonged trade war; 2) Serving a niche market with high entry barrier; 3) Sustainable business model; 4) Established development blueprint; and 5) Well-managed balance sheet.

• A comprehensive industrial solution provider. AME has 4 business segments: industrial property development, construction, engineering services, property investment and management services.

• Impressive construction order book - Current outstanding order book of RM302.1m (0.7x FY2020F revenue) includes a single-storey warehouse and a two storey factory unit and warehouse with a six-storey office block in Selangor, precast works for a residential flat development comprising two blocks of apartment train depot expansion in Singapore as well as customization of factories would be able to provide earnings visibility for the next 3 years. We estimate orderbook replenishment of RM250m for FY21 and FY22.

• Strong earnings growth. We are projecting a 3-year CAGR growth of 24% for AME’s top line from FY2020- FY2022. The growth is underpinned by its outstanding order book amounting to RM348.5m in the construction and engineering division, as well as the total estimated undeveloped GDV of more than RM1.5b in its property division. Likewise, profit after tax and minorities interest (PATAMI) is set to grow at 3-year CAGR of 26.4%.

• Industrial property underpins future earnings - The successful launched industrial parks: i-Park@SiLC, District 6@SiLC, i-Park@Indahpura Phase 1 & 2 and SME City with aggregate RM1.5b gross development value (GDV) received compelling response from the market. Meanwhile, the remaining major ongoing projects (GDV: RM532m) reached bottleneck levels prompting the Group to introduce i Park@Senai Airport City Phase 3 and i-Park@Indahpura Plot 108 in 1Q and 2Q CY2020 respectively with total RM675m GDV. Closer to date, the latest unbilled sales of RM121m stands as the next 2 years earnings driver.

• Recurring income powered by property investment & management services - The Group’s strategy to establish & operate dormitories and retain 20% of property for leasing and capital gain in its i-Parks provides future recurring income to ensure the business sustainability as it diversifies away from its cyclical property and construction businesses. Notably, the 2 dormitories at iPark@Indahpura and iPark@Senai Airport City and 36 leased industrial units contributed RM25.3m in revenue & RM20.3m in operating profit in 9MFY20. Recently, AME has clinched a deal in MCO period with “Enics AG”, a global EMS provider to build first SEA manufacturing site at i-Park@Senai Airport City, targeting to be delivered to “Enics AG” in early-2021. The deal is expected to contribute positively to Group’s bottom line in the coming years. Indeed, that’s a clear indication that MNCs are actively diversifying their supply chains to other region in an urgent manner.
• Established development plan pointing for future expansion – The Group is planning to replenish its land bank by targeting Johor and Selangor areas. The one-off expenses (est. RM69m) on land will form a foundation of future industrial park building and expand its footprint beyond Johor. Together with the budget of RM9m to expand its precast concrete fabrication, the Group is able to take up more precast works for internal and external projects in future despite current contribution to the Group’s top line, thus far, not being significant (with RM31.7m remaining orderbook), The expansion is expected to enhance its annual capacity of 12,000m3 per year.
• Expansion backed by sturdy balance sheet – AME’s cash pile ballooned to RM179m (42sen/share) in 9MFY2020 from RM102.4m in 9MFY2019, mainly due to the fund raised from IPO in 2019. The net gearing as of 9MFY2020 is close to 0.2x, thus provides the Group ample room to gear up for further land bank acquisition as well as supporting its capital intensive construction projects. We estimate the Group’s net gearing to maintain below 0.2x in the next 2 years after factoring in land acquisition (RM69m) and working capital (RM23m) raised from IPO. Besides, the Group has fixed 20% dividend policy to distribute dividend on a regular basis to reward long-term investors should the cash flow continue to be stable.

Valuation/Recommendation

• BUY with a target price of RM2.14 - The TP was derived by ascribing a 13.0x PER to the Group’s FY2021F EPS, which is in line with -1SD of 10-year Bursa Malaysia Construction Index mean PER and the valuation we peg to the other small-mid cap construction companies under our coverage. Our TP renders an upside of 26% from its closing price of RM1.69.

• Decent dividend yield under prevailing low interest rate environment - We forecast gross DPS of 3.25 sen /share and 4.28 sen / share for FY2021F and FY2022F respectively, assuming a dividend payout ratio of at least 20% of its net profit. This will translate into a gross dividend yield of 1.92% and 2.54% respectively.

Source: JF Apex Securities Research - 19 Jun 2020