Following up on our last research note, we are upgrading FY17-18E EPS by 14-12% and our TP to RM1.60 after accounting for the net positive impact from : (i) proposed acquisition of Monolight, (ii) private placement which will raise RM26.3m, and (iii) their new partners – Tera Capital for the development consultancy of One Jesselton. Albeit the higher TP, the stock is now NOT RATED from Trading BUY post the 16% share price run-up since our last note.

Acquisition of Monolight. On 30th June 2017, GBGAQRS had proposed to acquire Monolight for RM26m, to be satisfied entirely through new shares issuance at RM1.33/share. To recap, Monolight was awarded an RM424m affordable homes contract in May 2016 for which they had formed a 51:49 JVA with GBGAQRS. We are positive on the acquisition given that it is EPS accretive by c.20% and GBGAQRS would now enjoy 100% of the project’s contribution translating into an additional profit of c.RM14m to FY17 based on 10% PAT margins assumption (refer overleaf).

Private placement. Apart from the proposed acquisition of Monolight, GBGAQRS is also raising RM26.3m through a private placement with placement price fixed at RM1.35/share for 19.0m shares. The placement is expected to fund GBGAQRS’ working capital for their ongoing projects, i.e. SUKE and PPSAS. Post new share issuance from the acquisition and placement, net gearing is expected to decrease to 0.66x (from 0.74x as of 1Q17).

Partnering Tera Capital. GBGAQRS has signed a MoU with Tera Capital with an intention to jointly develop One Jesselton (GDV of RM1.8b). We are positive on the partnership as having an experienced partner such as Tera Capital will expedite One Jesselton development and also reduce execution and operation risks for GBGAQRS’ hotel and suite operations (refer overleaf).

Outlook. YTD, GBGAQRS has secured RM360m worth of contracts (excluding the additional contract portion acquired from Monolight) accounting for 51% of our RM700m order-book estimate. We remain confident with GBGAQRS in achieving our target, backed by potential contract wins from LRT3, Pan Borneo Sabah and ECRL.

Earnings upgrade. We upgrade FY17-18E earnings by 24 -32% on: (i) acquisition of Monolight, and (ii) interest savings of c.RM10m in FY18 post conversion of warrants given that they are currently in the money with expiry in July 2018. Our earnings is derived on the back of: (i) construction outstanding order-book of RM1.7b coupled with FY17E replenishment rate of RM700.0m, and (ii) property sales worth RM100m in FY17 and RM250m in FY18 from their Jesselton project.

Not Rated with TP of RM1.60. Since our previous note (refer to report dated 16/5/17), GBGAQRS’ share price has risen by 16%, exceeding our initial TP of RM1.51. Post our earnings upgrade, our SoP-driven TP is increased to RM1.60, but we have changed our recommendation to a Not-Rated call (previously Trading Buy) given the recent rally which could mean that most positives have been priced-in. We ascribed a 13x FY18E PER for their construction arm, which is at the higher end of our 9-13x band of targeted peers which we deem fair given; (i) their superior FY17-18E EPS growth compared to the small-mid cap peers registering 50%-52% and against peers’ average of 6%-11%, and (ii) FY18E construction PBT margin of 13%, which is above peers’ average of 11%. Meanwhile, we conservatively peg their property arm at 6x, which is at the lower end of peer’ range of 6-9x. Our TP implies FY18E PER of 12.0x.

Source: Kenanga Research - 3 Aug 2017