INVESTMENT HIGHLIGHTS

• AQRS trading in-line with our TP

• However, FYE17/FYE18 earnings estimates intact

• KotaSAS and SEDCO Precast are catalyst to watch

• Altogether, we downgrade our recommendation to NEUTRAL with a TP of RM1.24 per share

AQRS trading in-line to our TP. We are prompted to reassess our view on AQRS’s as its share price recently traded in-line with our TP. Recalled that, AQRS’s current orderbook is RM1.8bn furthermore its recent FY16 posted a commendable earnings of RM22.7m (+336%yoy). Additionally, we have reasoned in our previous report (24.02.17) that the management has shown their mettle in turning-around the company Hence, we are not surprised that YTD - the share price has surged +37.02%.

However, earnings estimate remains intact. Despite rising share price, we are adamant in maintaining our earnings forecasts for FYE17/FYE18. At writing, AQRS’s PER is 21.79x which we reckon has run-up sharply above our conservative estimate for small-midcap construction companies of 12x PER. We will shift our view in two scenarios; (i) orderbook replenishment rate exceeds target of RM600m by +20% or RM720m for FYE17 and (ii) adjustment to our DCF valuation by increasing our risk-adjusted cash flow forecast from 40% to 55%.This is to comfort any ‘hard landings’ of revenue recognition gaps between the 2QFYE17 and 4QFYE17 resulting to earnings’ blips.

Catalysts to watch. We are also mindful of packages under the recently announced alignment of East Coast Railway Link where one of the Kuantan stations is located in Kota SAS (Figure 1). Note that, Dato’ Azizan Jaafar, CEO of Gabungan AQRS owns direct stake of 10.8% in Tanah Makmur KotaSAS Sdn. Bhd. Consequently, AQRS potentially stands to benefit from future development in KotaSAS especially transitoriented development projects. Additionally, packages of pre-casts segment for Sabah Pan Borneo is expected to lend further support to AQRS in FYE18 due to its subsidiary of SEDCO Precast Sdn. Bhd. (49% JV with Sabah Development Corporation.) We are estimating RM400m worth of orders within the construction period.

Recommendation. Downgrade our recommendation to Neutral 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 - 14 Mar 2017