INVESTMENT HIGHLIGHTS

• Driving better corporate governance

• Increase target orderbook replenishment rate by +16.67%

• Precast segment as a levelling factor

• Upgrade recommendation to BUY with a TP of RM1.49 per share

We visited the Managing Director of AQRS Berhad, Dato’ Azizan Jaafar recently and found out that AQRS’s transformation plan is showing its grit.

Key takeaways from the visit ;

Driving better corporate governance. We found the management is ‘walking the talk’ by focusing on institutionalizing the shareholdings and seeks to increase more independent directors on its board. Currently, local institutions holds c.40.1% of its shares and the management is seeking to increase independent directors on its board to balance risk, controls and performance from expanding orderbook of RM1.8bn. This is part of management’s preparation in anticipating jobs lift-up and preserving shareholder’s value. We were guided that management’s key priorities is to solidify working capital, growing EBITDA and sustaining its margin profile. (Figure 1 and 2)

Increase target orderbook replenishment rate by +16.67%. We are upgrading our target orderbook replenishment rate from RM600m to RM700m (+16.67%). Kota SAS is cataclytic to our earnings forecasts for AQRS for FYE17-FYE19. So far, from 6000 residential units to be constructed, 1206 residential units have sold out leaving a gap of 4794 units. Furthermore mixed development i.e. transit-oriented development is underway considering its sheer size of 3,500 acres along the ECRL’s proposed stations of Gambang and Kota SAS. We soften the role of Kota SAS for AQRS’s bottom line in our previous notes but after the announcement on ECRL’s route we estimated that the development will pickup exponentially to commensurate the progress of ECRL slated to complete in 2022. We believe that the routes of Gombak-Kuantan (235km) must complete within the period of FYE18-FYE19 in order for ECRL to meet its deadline. Thus, this is when the S-curve of projects from Kota SAS will potentially start to kick in. We opine that the projects under the Kota SAS development is in an uptrend - where AQRS as a main contractor stands to benefit. The increase in our orderbook target trickled into higher revenue recognition of +12.8% from Kota SAS and Sungei Besi-Ulu Klang Highway

Precast segment as a levelling factor. With two major projects on hand (Kota SAS and Kota Kinabalu Waterfront City), AQRS’s supply chain would be more efficient with internal pre-cast plants. Its subsidiary SEDCO Precast sits in a sweet spot being the potential frontrunner to supply pre-cast materials for Pan Borneo in Sabah. We are estimating packages worth RM300m (18.0% Profit Margin) for the supply of pre-cast materials for the 706km Sabah highway. Additionally, we are confident that AQRS will venture into pre-cast materials in Pahang in FYE18. This is to take advantage of ECRL construction requirements and Kota SAS developments. We fine-tune our forecasts to reflect the strong possibility of 10% contribution to AQRS’s bottom line in FYE18/FYE19 from pre-cast sales. Thus, pre-cast segment will be a levelling factor to comfort earnings blip.

Recommendation. Upgrade our recommendation to BUY with a TP of RM1.49 per share based on DCF valuation (WACC of 6.2%, risk adjusted cash flow assumptions at 40% and 10-year cash flow forecasts). We fine tuned our earnings to impute an additional +12.8% of revenue from SUKE Highway, Kota SAS and Pahang related projects. Our risk adjusted cash flow decreased as a result of the aggressive turnaround by management, its commitment for tighter control for projects risk and strengthening board’s role in AQRS’s corporate governance.

Source: MIDF Research - 27 Apr 2017