Results

• AME posted 1QFY22 net earnings of RM7.2m, which surged 35.8% yoy but tumbled 65.9% qoq.
• Result below expectations. 1QFY22 net profit accounts for 12-13% of our full year forecast and street estimates. The weaker-than-expected result is due to lower revenue and margin achieved particularly for its Property Development division, as partly impacted by Full Movement Control Order (FMCO) in June coupled with higher tax expense. Nevertheless, we opine that the Group would catch up on construction progress in the remaining quarters of FY22F.

Comment

• Construction, Engineering and Property Investment & Management Services lifted yoy performance amid sluggish showing of Property Development. AME achieved better 1QFY22 underpinned by its Construction (segmental revenue: +182.3% yoy and segmental profit: RM4.2m vs 1QFY21 loss of RM1.5m attributable to higher construction progress on existing projects), Engineering (segmental revenue: -13.0% yoy and segmental profit: RM1.1m vs 1QFY21 loss of RM2.1m) as well as Property Investment division (segmental revenue: +21.8% yoy and segmental profit: +17.1% yoy on the back of higher rental income from additional units of factory being leased to tenants and higher rental income from workers’ dormitories). However, Property Development showed disappointing performance with its segmental revenue and profit down 23.5% yoy and 82.6% yoy respectively. Also, the lower JV contribution (lower sale of industrial properties in i-Park@Indahpura (Phase 3) partly offset the yoy gain.
• Weaker qoq result was bogged down by Construction, Property Development and Engineering segments as affected by FMCO. On qoq basis, the Group’s earnings were dragged down by Construction (segmental revenue: -29.3% qoq and segmental profit: - 65.0% qoq), Property Development (segmental revenue: - 77.9% qoq and segmental profit: -97.1% qoq) as well as Engineering (segmental revenue: -43.4% qoq and segmental profit: -56.0% qoq) as affected by temporary halt of business activities during the FMCO in June 21 amid stronger contribution from its Property Investment (segmental revenue: +8.2% qoq and segmental profit: +32.3% qoq). Also, the higher effective tax rate during this quarter exacerbated the fall in the Group’s bottom line (1QFY22: 31% vs 1QFY21: 28%).
• Vying for more works amid challenging outlook. AME has an outstanding orderbook of RM148.4m of construction and engineering works as of 1QFY22. The Group envisages to replenish order book of RM100-130m (vs RM65.2m in FY21) worth of contracts for FY22 with RM1b on-going tender book. Thus far, AME has successfully clinched RM43.5m works. Margin wise, we believe it could trend lower due to intense competition for jobs bidding amid scarcity of job and higher raw material prices.
• Cautiously optimistic on property sales. On Property Development, we believe AME could achieve higher FY22 property sales than FY21’s RM140.3m and meet its target of RM200m (the Group chalked up sales of RM64.8m in 1Q22). During last quarter 4QFY21, the Group recorded RM107.8m bookings, mainly in i-Park@Senai Airport City, pending for conversion to SPA. Meanwhile, the Group boasts RM110.0m unbilled sales as of 1QFY22 which render earnings visibility for the next 6 months. Having said that, the Group highlighted that the protracted and evolving Covid-19 situation worldwide and the implementation of the nationwide lockdown have been adversely impacting the foreign direct investment flows to the country. The take-up of its i-Park industrial properties may be under pressure from the prolonged border closures.
• Industrial park development and worker’ dormitories underpin FY22F earnings. Moving forward, the Group will continue developing i-Park@Senai Airport City (Phase 3) and expanding its construction and property development segments to improve the Group’s bottom line. On top of that, the Group expects higher contribution from the rental of workers’ dormitories mainly its i-Stay@Indahpura in which 2700 beds to be added into existing capacity with target completion date in Dec 2021. We shall see an additional yearly rental income of RM7.5m to the Group if operating at full capacity.

Earnings Outlook/Revision

• We retain our profit forecasts for FY22 and FY23 at RM58.3m and RM69.5m respectively as we believe AME would catch up on construction progress in the remaining quarters of FY22F.

Valuation & Recommendation

• Downgrade to HOLD from BUY on AME with a higher target price of RM2.78 (previously RM2.53) as we rollover our valuation to FY23. Our revised target price is now pegged at PE multiple of 17.1x FY23F core EPS which is in line with its +1SD of 1-year mean PE
• Whilst we see limited upside on the share price in the near term, we favour the stock over the long run banking on: 1) potential landbanking in Klang Valley and 2) potential listing of industrial REIT in the medium term with asset size of around RM500-600m which includes i-Park (leasing of industrial properties) and i-Stay (worker dormitories).

Source: JF Apex Securities Research - 27 Aug 2021