INVESTMENT HIGHLIGHTS

• Earnings expected to rise from swelling orderbook

• Construction activities in Pahang and Sabah beckons higher orderbook

• Downside risks balanced by lateral construction value chain

• Initiate coverage with BUY with TP of RM1.24 per share

Background

Gabungan AQRS (AQRS) started through an amalgamation of four construction and engineering companies merging in 2010. The merger is to create an integrated construction company with strong expertise in civil, structural and building engineering to complement its forte in developing properties. Key Investment Thesis:

Expecting FYE17/FYE18 earnings to advance and drive share price. We believe that AQRS’s earning will advance from its current base by 16% due to accretion from its expanding orderbook of RM1.8bn. Furthermore our assessment; (i) factored the cost engineering that management seeks to achieve in FYE17/FYE18/FYE19 by lowering interest expense and (ii) its possible entry into further development of Kota SAS in Pahang and Kota Kinabalu’s One Jesselton.

Encouraging development narrative of Pahang and Sabah beckons higher construction activities. Underpinned by the growing construction activities in Pahang and even Sabah; AQRS will stand as beneficiary of residential, non-residential and infrastructure projects influx. Its orderbook constituent is self-explanatory on the level of AQRS’s involvement in the two states aforementioned.

Downside risks balanced by lateral value chain. Swelling orderbook adds up to risk of executions and project delays. However, AQRS mitigate the risks by mobilizing its construction and property team to undertake projects such as One Jesselton, Kota Kinabalu, Sabah and Kota SAS, Kuantan, Pahang. The strategy will minimize the impact of higher mobilization costs which influenced its earnings previously.

Recommendation. Initiate coverage with a TP of RM1.24 per share based on DCF valuation (WACC of 6.2%, 40% risk adjusted cash flow assumptions and 10-year cash inflow forecasts).

Source: MIDF Research - 23 Jan 2017