• Mixed FY16 results but still positive

• Earnings driven by construction segment

• Maintain our earnings estimates

• Nonetheless, we maintain our BUY recommendation with a TP of RM1.24 per share

FY16 results mixed but give positive underlying tone. AQRS’s FY16 earnings of RM22.7 (+336% YoY) missed ours but exceeded consensus’ expectation at 68% and 105% of full year estimates respectively. The mixed results are imbued by aggressive improvements in segmental pretax profit from construction. Notably, AQRS has expanded its orderbook to RM1.8bn hence the transfer of it billings to revenue is inevitable. Its revenue shows an improvement from RM272.5m in FY15 to RM330m in FY16 (+21% YoY).

Earnings driven by construction segment. The surge in AQRS’s orderbook of RM1.8bn shows the management’s mettle for turnaround of the company. The orderbook comprises of quality and iconic project such as the Kota Kinabalu Waterfront and Kota Sultan Ahmad Shah in Kuantan Pahang. We are expecting that the replenishment of around RM200m worth of potential jobs to be bagged for FYE17 from Sabah and Pahang for affordable housing and roadworks related to Pan Borneo. The improvement is notable due to the changes of company’s leadership and its direction to focus on construction segment which is their core competency.

Impact on earnings. Despite meeting only 68% of our target, we make no changes to our forecast as we believe that the management will be able to recoup the difference. We reckon that the current result displays the start of a positive turnaround. The finance remains a key risk; it expanded from RM10.8m in FY15 to RM15.1m in FY16 (+40% YoY). This commensurate with the expanding orderbook for trade finances i.e. payable vs. receivables.

Recommendation. Maintain our BUY recommendation 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 - 24 Feb 2017