KEY INVESTMENT HIGHLIGHTS

• 2QFY20 results posted a loss of -RM4.5m, mainly due to both lower progress billings and property sales during MCO

• 1HFY20 plunged into marginal losses of -RM0.6m which is below ours and consensus expectations

• Construction work sites to resume at slower pace post-MCO due to stringent COVID-19 measures

• Healthy order book of about RM1.2b which translates into earnings visibility for the next two to three years

• Downgrade to NEUTRAL with a revised TP of RM0.75

Posted marginal losses. Gabungan AQRS Berhad (AQRS)’s 2QFY20posted a loss of -RM4.5m (-143.0%yoy). As a result, this led to the group’s cumulative 1HFY20 financial performance to register a marginal loss of -RM0.6m (-102.8%yoy). This was primarily due to the work disruption brought on by the movement control order (MCO) on construction which led to lower progress billings and property sales. Note that the losses were excluding impairment provision of RM52.6m on inventories and construction project and RM17.0m in Liquidated Ascertained Damages (LAD). This came in below ours and consensus expectations. Moving forward, we expect AQRS’s construction activities to gradually recover in 2HFY20 albeit at a slower pace and subdued property sales.

Construction segment to gradually improve at a slower pace in 2HFY20. Given the lower revenue recognition at the construction segment in 1HFY20, the profit before tax (PBT) margin shrank to 1.8% (-6.8ppts yoy). Moving forward, we expect sequential improvement in the financial performance at this division on the partial resumption of work site operations post-MCO albeit not yet regain pace to the pre-MCO level given the stringent standard operating procedures (SOPs) needed to put in place to curb potential virus outbreaks. This might lead to slower recovery in terms of progress billings in 2HFY20 before potentially rebounding to full operations in FY21. Additionally, it is worth noting that AQRS current outstanding order book stood at RM1.3b, which will provide earnings visibility until 2023.

Recovery in property division might be gradual. The division posted a loss before tax (LBT) of -RM2.6m (- 293.8%yoy). This is widely anticipated due to the slower revenue recognition as MCO impeded the construction progress and property sales. Meanwhile, booking rates have been hitting record high in July and August 2020 post-MCO and the group has secured bookings for 267 units worth about RM192.7m up to 27 August 2020, particularly from its E’Island Lake Haven at Puchong. We opine this was mainly due to the induced-demand arising from the revival of Home-Ownership Campaign (HOC) and the group’s repricing measures of its completed inventories. Moving forward, we opine that such upward trajectory might not be sustainable given the ongoing COVID-19 pandemic and extended RMCO to impact business and consumer sentiments, causing property sales to normalise.

Earnings estimates. We are making some housekeeping changes to our earnings estimates to also take into account the impact of the MCO on the group’s businesses. We are revising our FY20/21/22 earnings forecast to RM30.8m, RM46.8mand RM60.9m respectively.

Target price. We are revising downward our TP to RM0.75 (previously RM1.01) which is derived by pegging a PER of 7.9x to the group’s FY21 EPS of 9.5sen. Note that the PER is the group’s two year historical average.

Downgrade to NEUTRAL. In the near term, we expect that the group’s revenue and earnings prospects to remain lacklustre in anticipation of the slower resumption of construction and business activities and limited workforce capacity at work sites in view of the stringent Covid-19 standard operating procedure. This might dampen the earnings prospects in the short-to-medium term as construction progress billings would be affected on slower work progress. On the property segment, we opine that sales to remain subdued given the weak consumer sentiments and avoidance of big-ticket items in the foreseeable term. Nonetheless, the group’s prospect is well-supported by its strong outstanding order book of about RM1.3b which provides earnings visibility for the next two to three years. In addition, the on-going cost rationalisation initiatives which lead to lower operating costs (-40%yoy) seen in 1HFY20 to partially support earnings momentum. Given the lack of positive near-term catalysts such as the overhang of mega infrastructure projects (e.g. KVMRT3 and KL-SG HSR) as well as subdued business sentiments, we are downgrading our recommendation on AQRS to NEUTRAL from BUY previously.

Source: MIDF Research - 1 Sept 2020