• Achieved two landmark developments

• Attained Part 1 of 3 transformation targets by management

• Positive to earnings

• Nonetheless, we refined our TP to RM1.62 per share to reflect our earnings upgrade

Achieved two landmark developments. A group of private investors led by Tan Sri David Kong of Nirvana Group has offerred to purchase 100% of Monolight IBS Building System Sdn. Bhd (previously AQRS’s 49.0% JV) in return of 19.56m shares or 5.01% stake in Gabungan AQRS at RM1.33 per share. Secondly, AQRS has proposed the placement of 30m new shares to expand its working capital. The exercise is slated to enlarge AQRS’s shares from 390m to 409m shares or +5.0%. These are two catalytic landmarks in the company’s transformation plan. The entrance of new shareholders signals Street’s interest and confidence on AQRS’s potential upside. Note that, the shares of Monolight was atypically exchanged with AQRS’s proposed new shares instead of RM26m consideration in cash by the new shareholders. On the other hand, the placement intends to increase its financial agility to undertake larger projects and ushering strategic cornerstone investors. We view that the news goes hand-in-hand with AQRS’s growth narrative.

Attained Part 1 of 3 transformation targets by management. In our previous report (27.04.17), we have cited that the management set 3 agendas to grow revenue and earnings; (i) solidify working capital, (ii) growing EBITDA and (iii) sustaining margins. Now, the management has attained the milestone to strengthen their working capital. We suspect AQRS’s is preparing to bid for packages under ECRL, Pan Borneo Highway in Sabah, mobilizing the project team for Kota Kinabalu Waterfront and reducing its financial expenses. The placement intends to raise between RM390.3m to RM550.3m.

Positive to earnings. The new shareholders’ unique entrance is positive to AQRS’s bottom-line consequently it is inevitable for us to upgrade our earnings as Monolight’s projects under PR1MA package amounted to RM424.23m will be recognized fully on the back of 12.0% profit margin for the duration of 36-months. Hence, we add RM8.8m or +23.03% to our earnings and RM72.1m or +16.3% revenue estimates for FYE17/18/19. Apart from that, we changed our risk assessment; expressed in our DCF valuation as 45% certainty equivalent in the expected cash flow projection. We believe PR1MA projects have lower risk profile as it is subsidized by the government but risks will flit slightly due to orderbook size.

Recommendation. As a result of our earnings upgrade we adjust our TP to RM1.62 implying +15.7% upside per share based on DCF valuation and changes to our earnings forecast and terminal value. (WACC of 6.2%, risk adjusted cash flow assumptions at 45% and 10-year cash flow forecasts).

Source: MIDF Research - 3 Jul 2017