• Constructive JV with Tera Capital Ltd (TC)

• One Jesselton is anchored by Sabah’s buoyant tourism sector

• Sustainable revenue stream

• Maintain BUY with TP of RM1.62 per share

Constructive JV with Tera Capital Ltd (TC). The entrance of TC has confirmed our suspicion indicated in the previous report (03.07.17) that AQRS is working to strengthen its working capital in its transformation plan. Furthermore it minimizes key execution risk due to One Jesselton’s large gross development value (GDV) of RM1.8bn. AQRS would be able to offset the execution risk of by partnering with an experienced partner in hotel management and operation consequently ring-fencing its operating income from unexpected shortfall from hotel operations. Notably, since the ascension of Dato’ Azizan Jaafar in May-17, AQRS’s operating income grew by CAGR) of +14.6%QoQ. (Figure 1). We view the JV as another constructive milestone towards transforming AQRS as big-cap construction player.

One Jesselton is anchored by Sabah’s buoyant tourism sector.

We reckon that the project will give AQRS a competitive advantage as the main business driver are arriving tourists to Sabah. For the past 3 years, Sabah has recorded total tourist arrivals between 3.55m to 3.42m annually (Figure 2). Furthermore, we doubt that the Tourism Tax will have an adverse impact to future AQRS’s hotel business because it is buffered by the duty-free mall and holiday-makers from cruise liners docking within the OJ’s future development.

Sustainable revenue stream. Furthermore, we are optimistic that AQRS will be able to sustain its revenue stream given its sturdy RM1.8bn orderbook (approximately 5.45x construction revenue cover and working capital/net income cover of 8.3x) backed with lower debt ratio of 0.76x against its KLCon Index peers of 0.81x. We are confident that AQRS will be able to meet its RM600m orderbook replenishment target. Year-todate (YTD), AQRS has secured RM370.9m contract for construction of Pusat Pentadbiran Sultan Ahmad Shah, Kuantan.

Maintain BUY. We reiterate our BUY recommendation with a TP of RM1.62 based on DCF valuation (WACC of 6.2%). We will fine tune our valuation based on AQRS’s shares placement once it is completed

Source: MIDF Research - 26 Jul 2017