Results

• AME posted a reported net profit of RM5.3m for its 1QFY21 result as compared to a net profit of RM13.1m for its 1QFY20.

• 1QFY21 below street and in-house expectations. The Group’s 1QFY21 result accounts for 8.2%/9.0% of in-house /consensus estimates mainly due to core segments, i.e. the Construction and Engineering faced operational disruptions as affected by the movement control order (MCO).

Comment

• Subdued QoQ earnings. The Construction and Engineering recorded losses of RM1.5m and RM2.1m respectively, which dragged down the overall operating profit to RM5.7m (-68% QoQ). Positively, Property Investment & Management Services delivered a double-digit growth amounted to RM7.0m (+28% QoQ) which buffered the loss-making units as well as Property Development segment (-68% QoQ). The subdued performance was caused by the CMCO and RMCO which troubled the construction progress. Thus, net profit of the Group (excluding fair value gain) slid to RM5.3m (-39% QoQ) from RM8.6m.

• Despairing YoY performance. The disappointing operating profit (-74% YoY) mainly caused by loss making segments (Construction & Engineering) and Property Development (-67% YoY) despite higher rental income from Property & Dormitories (+39% YoY). In addition, the Group also achieved higher share for its JV profit (+81% YoY) pursuant to better sales in its industrial properties. Overall, the Group’s net profit slid to RM6.6m (-66% YoY) from adjusted net profit RM19m (excluding fair value gain).

• Nimble business strategy. We are of the view that AME is well-prepared for any negative economic shock resulting from the COVID-19 pandemic. The Group still recorded a positive bottom line despite a substantial dropped in major segments namely Construction and Engineering. Recurring income derived from the rental of property and dormitories acts as a saviour under current economic shock due to its sustainability characteristics. Moving forward, the Group plans to expand its worker dormitories aggressively to reassure the business model is much more resilient and effective.

• Benefiting from intensified trade diversion. The famed i-Park Industrial Parks of the Group in Johor is capitalizing the prevailing trend of MNCs relocation pursuant to supply chain diversification after the incident of Covid-19 which was originated in China and protracted US-China trade tension. Besides, we believe Malaysia will be benefited greatly from Japan government’s intention to encourage Japanese corporation to shift their productions out of China.
   
• Potential lower FDI inflow due to relatively unattractive corporate tax rates. Indonesia has implemented tax reforms in which corporate income tax will be reduced to 22% from 25% for 2020 and 2021, and will be further cut to 20% in 2022. Besides, the 8% corporate tax cut by India which was announced in 2019 has already seen some positive outcomes as technology behemoth Google and Facebook are planning to invest nearly USD10.2 billion in India. On top of that, famed iPhone assemblers Wistron and Foxconn have already started productions of iPhone to entitle for the 10% corporate tax cut for new manufacturing firms. Notably, Foxconn is planning to invest USD1 billion in India for extending its existing assembly plant to cater for the strong local demand. In a nutshell, the lower tax rates introduced by these nations would lure MNCs away from Malaysia.

Earnings Outlook/Revision

• We reduce our FY21F and FY22F net earnings forecasts by 34.1% and 10.2% respectively, after adjusting lower on our assumptions for orderbook replenishment.

Valuation & Recommendation

• Maintain BUY with an unchanged target price of RM2.02 following our earnings cut. Our revised target price is now pegged at higher PE multiple of 14x CY21F (from 13.5 PE) which is in line with -1SD of 10-year Bursa Malaysia Construction Index mean PER. We peg our valuation to CY21 instead of FY21 considering the impact of MCO & CMCO in 1st half of CY2020 which caused exceptional profit drop as well as quicker than expected economic recovery post CMCO.

Source: JF Apex Securities Research - 27 Aug 2020