Investment Highlights

• News influx injected fresh interest

• Beneficiary of buoyant activities in Kuantan region

• Operational improvements underway

• Maintain BUY at an adjusted price of RM2.30

News influx injected fresh interest. Flurry of news for East Coast Railway Link (ECRL) injected fresh interest for AQRS prompting the share price to surge +8.8% year-to-date (YTD). ECRL is a boon for AQRS’s earnings for the FYE18/FYE19 due to its extensive involvement in the development of Kota Sultan Ahmad Shah and Pusat Pentadbiran Sultan Ahmad Shah (PPSAS). Pace is picking from the appointment of AECOM to provide site supervision services for stations, viaducts and depots by China Communication Construction Co. Ltd in in 9th January, 2018. It is a good move welcoming progressive steps towards the start of ECRL’s construction.

Beneficiary of buoyant activities in Kuantan region. In relations to that, buoyant industrial activities within Kuantan-Gambang-Kerteh region would see the need for housing and other transit oriented development (TOD). In view of the packages awarded in November, 2017 the size of projects would be around RM200m-RM250 for TOD based projects and civil works relating to construction of stations and basic infrastructure within the Kota SAS vicinity. We reckon that AQRS would be the beneficiary to fulfil this needs. If that is so, this would contribute potentially another +12.5% to our earnings projection in FYE18 Furthermore, with the LRT3 (Bandar Utama Johan Setia) project award, earnings would see a better trajectory potentially in the Q2FYE18.

Operational improvements underway. The influx of news couple with a strong orderbook of RM2.77bn could also spell the improvement in operations as the volume of work increases and the project teams are mostly concentrated in Pahang and Klang Valley. We increase our valuation by assigning higher certainty equivalent factor by apportioning lower failure rate of 15.0% from 40.0% for projects undertaken by AQRS and increasing our operational margin forecast by +2.0% to +3.0%. Consequently, in our valuation for value for operating assets increased from RM1.12bn to RM1.34bn (+19.6%) and value of equity grow from RM813m to RM1.03bn (+23.0%) throughout the valuation period.

Recommendation. Premised on that, we maintain our positive stance on AQRS with BUY recommendation with an adjusted target price of RM2.30 per share. Notably, AQRS is one of our top pick small-cap construction companies due to its orderbook replenishment abilities (Figure 1) and sturdy orderbook.

Source: MIDF Research - 11 Jan 2018