Fair Value : RM1.35 | Recom : Outperform (New Coverage)

This time it’s for "rail". Gabungan AQRS (AQRS) caught our attention when it clinched a RM303.5m subcontract for Package V1 of the Sg Buloh – Kajang (SBK) MRT Line project in Sep 2012. We believe the contract is a turning point for AQRS as it has effectively lifted the company from “just another contractor” to a new force to be reckoned with in the local construction sector.

The investment case. The basis of our investment case for AQRS are: (1) AQRS has just emerged a serious contender for infrastructure projects in Malaysia, particularly, rail projects that will underpin the current construction upcycle; (2) AQRS offers earnings stability, backed by a strong construction orderbook of RM1.1bn as well as a portfolio of good property development projects with a total GDV of RM1.5bn, and a “clean slate” (without loss-making “legacy” overseas contracts as well as outstanding overseas contract disputes); and (3) The company is in good hands, predominantly run (and substantially owned) by former engineers of Sunway.

Good progress on MRT job. We understand that AQRS has thus far made very good progress (16% physical completion) and margins from Package V1 of the SBK MRT Line project thanks to: (1) Its very meticulous planning prior to the commencement of physical works; (2) Its decision to invest in three launchers (vis-a-vis only one for most other SBK MRT Line viaduct contractors); and (3) Package V1 of the SBK MRT Line project being located at a relatively less developed and less densely populated corridor (that means traffic diversion and relocation of utilities are less difficult to handle).

Risks. The risks include: (1) New contracts secured in FY12/13-14 coming in below our target of RM500m p.a.; and (2) Higher-than-expected input costs.

Start coverage with Outperform, fair value of RM1.35. We project AQRS’ net profit to almost double in FY12/13, driven predominantly by accelerated billings from key construction jobs, i.e. the RM303.5m Package V1 of the SBK MRT Line project and the RM141m road upgrading in Negeri Sembilan, coupled with steeper profit recognition from its three on-going property projects, i.e. Contours, Gombak Grove and The Avenue @ Kinrara Uptown, on more advanced completion milestones. We value AQRS at RM1.35 based on 10x FY12/13 EPS, in line with our 1-year forward target PER of 8-13x for the construction sector. AQRS’ balance sheet is strong with a net cash of RM26.9m or 7.6sen/share as at 30 Sep 2012.

Source: RHB Research - 21 Dec 2012