KEY INVESTMENT HIGHLIGHTS

• 3QFY20 results turned profitable to RM5.0m (vs -RM4.5m in 2QFY20) on higher property sales and resumption of work

• 9MFY20 normalised earnings also back to black of RM4.4m albeit still below ours and consensus expectations

• The group is expected to be beneficiary of the revival of mega infra projects in FY21 given its extensive experience

• Solid order book of about RM1.3b which translates into earnings visibility for the next two to three years

• Upgrade to BUY with a revised TP of RM0.85

Back to black. Gabungan AQRS Berhad (AQRS)’s 3QFY20 normalised earnings rebounded strongly by +209.7%qoq to RM5.0m albeit still lower on a year-on-year basis (-56.1%yoy). This was mainly driven by the resumption of its core business operations and higher property sales post-MCO. Cumulatively, the group’s 9MFY20 normalised earnings decreased by -86.8%yoy to RM4.4m, primarily dragged by lower contributions from its respective business divisions in 2QFY20. This came below our and consensus expectation. Moving forward, we expect AQRS’s construction and property activities to pick up pace in 4QFY20 and return to full operations in FY21.

Construction work pace to achieve almost pre-MCO level. Albeit the segment reported a lower profit before tax (PBT) of RM4.4m (- 90.3%yoy) in 9MFY20, we expect sequential improvement in financial performance on higher progress billings as construction work pace normalises to pre-MCO level and current work sites were unaffected by CMCO. This will lead to a decent recovery in terms of progress billings in 4QFY20 and potentially in full force with catch-up strategies to ramp up work progress in FY21. Additionally, it is worth noting that AQRS current outstanding order book remain solid which stood at RM1.3b, which will provide earnings visibility until 2023.

Property segment to be a bright spot. Despite the advent of Covid19 pandemic, the group still managed to turn a profit at its property segment with PBT of RM1.4m in 9MFY20 as compared to -RM0.6m in 9MFY19. Notably, the 9MFY20 PBT margin rebounded strongly to 9.1% from losses in the corresponding period. On a positive note, the reintroduction of the new Home Ownership Campaign as well as the stamp duty exemption limited to houses priced under RM500k as announced in Budget 2021 until 31 December 2025 would impact positively on AQRS’s property development segment as the campaign bodes well the Group’s ongoing property developments namely E’Island Lake Haven, The Peak and Contours Melawati Height which mostly fall under the scheme. To note, the group’s unbilled property sales stood at RM213.0m as at 30 September 2020.

Dividend. The group has declared an interim dividend of 1.0sen per ordinary share amounting to RM4.9m in current quarter which is payable on 7 Jan 2021 in spite of the weakened financial performance. This is predominantly premised on the group’s strong balance sheet with a healthy cash balance amounting to RM126.0m as of 30 September 2020.

Earnings estimates. We are revising downward our FY20 earnings forecast to RM13.5m on the group’s slower-thanexpected construction work progress resulting in lower progress billings while maintaining our FY21 and FY22 forecasts.

Target price. We are revising our TP to RM0.85 (RM0.75) which is derived by pegging a higher PER of 8.9x (previously 7.9x) to the group’s FY21 EPS of 9.5sen. Note that the PER is about +1SD of the group’s two year historical average. The higher PER is mainly premised on the positive sentiments on the local construction players which are poised to be benefited from the larger Budget 2021 allocation for development spending on mega public infra projects.

Upgrade to BUY. While the group's FY20 could be almost a washed-out year as construction operations were badly affected in 1HFY20 which were similar amongst its peers, we believe the group’s business and financial performance to rebound strongly in FY21. This is mainly premised on the group’s solid outstanding order book of RM1.3b with an earnings visibility over the next three years to support earnings momentum as well as anticipated higher property sales on stamp duty exemption and lower mortgage financing rates. We are also expecting sequential recovery in earnings following the resumption of construction and business activities and increased workforce capacity at work sites which were also unaffected by CMCO. Moreover, there is a potential ramp-up of work pace to make up for the time loss and this could speed up the progress billings in FY21. In addition, the on-going cost rationalisation initiatives which lead to lower operating costs (-40%yoy) seen in 9MFY20 will further improve profit margin in the coming years. We also opine that the group would be one of the beneficiaries for the continuation of mega public infra projects such as MRT, KL-SG HSR, KVDT2 and ECRL as announced in Budget 2021 which would bode well with its orderbook replenishment moving forward. This is largely predicated on the group’s extensive experience in railway project such as LRT3 and SUKE highway that requires value-added engineering know-how. All in, we are upgrading our recommendation on AQRS to BUY from previously NEUTRAL.

Source: MIDF Research - 27 Nov 2020