We  maintain  our  SELL  call,  forecasts  and  MYR0.95  FV.  This  follows yesterday’s  analysts’  briefing  that  offered  no  hints  of  any  major  new earnings  catalysts.  While  AQRS  is  a  good  proxy  to  infrastructure spending  in  Malaysia,  given  its  involvement  in  the  Klang  Valley  MRT project,  it  needs  to  grow  its  earnings  significantly  to  mitigate  dilution from outstanding warrants numbering 160m.

• Work  on  new  administrative  centre  in  Pahang  started.  AQRS  has started  work  on  a  new  iconic  administrative  complex  in  Pahang  called the Sultan Ahmad Shah Administrative Centre. The company is currently engaged  in  land  clearing  and  site  preparation.  AQRS  guided  that  its share of contract  from Phase 1 of the project is  about MYR230m.  This phase reported costs MYR399m in total.
• Bullish on new contract wins.  AQRS hopes to beef up its outstanding construction  orderbook  to  MYR1.8bn  by  end-2014  from  MYR1.2bn  at present. This implies new contracts wins of at least MYR600m in FY14. Management  guided  that these could potentially  come from: i) Phase 2 of  the  Sultan Ahmad Shah Administrative Centre, ii) infrastructure work packages from the Refinery and Petrochemical Integrated Development (Rapid) in Johor, and iii) in-house building jobs from its property projects.
• Improving  sales  from  The  Peak.  AQRS  is  confident  that  the  take-up rate  for  its  MYR557m  high-rise  residential  project  in  Johor  Baru,  The Peak,  will hit 65-70% before the year is out  from  about 36% at present. This is on the market gradually digesting  the property cooling measures introduced by the Government in late   2013, coupled with the availability of recently released bumiputera units from the project.
• Maintain  SELL.  The  prospects  for  the  construction  sector  are  strong, underpinned  by  an  extended  upcycle  driven  by  the  MYR73bn  Klang Valley  MRT  project.  While  AQRS  is  a  good  proxy  to  infrastructure spending  in  Malaysia,  given  its  involvement  in  the  Klang  Valley  MRT project, it needs to grow its earnings significantly to mitigate dilution from its  outstanding warrants.  FV  is unchanged at  MYR0.95 and is  based on a  10x  fully-diluted  FY14F  EPS  of  9.5  sen.  This  is  in  line  with  our benchmark  1-year  forward  target  P/Es  of  10-16x  for  the  construction sector.

Embarks On New Government Complex In Pahang
Work on new administrative centre in Pahang started. AQRS has started work on a  new  iconic  administrative  complex  in  Pahang  called  the  Sultan  Ahmad  Shah Administrative  Centre.  The  design  of  the  complex  is  based  on  the  State Government’s  emblem  (see  Figure  1).  The  company  is  currently  engaged  in  land clearing and site preparation. AQRS guided that its share of contract  from Phase 1 of this  project  is  about  MYR230m.  This  phase  reportedly  costs  MYR399m  in  total. Phase  1  comprises of  a  new  administrative  centre each  for  the  State  and  Federal Governments, a  new  Menteri  Besar’s  office  and  a  new  State  Legislative  Assembly building. AQRS is also eyeing the MYR1bn Phase 2 of the project comprising various Federal/State  Government  buildings  like a  new  state  police headquarters, AttorneyGeneral’s chambers and  a new state  mosque.  According to AQRS, unlike Phase 1, 
certain components of Phase 2 may be carried out via the private finance initiative (PFI)  model.  Note  that  the  company  first  officially  spoke  about  this  project  in  Sept 2013 (see our Company Update on AQRS dated 13 Sept 2013).

Bullish on new contract wins.  AQRS hopes to beef up its outstanding construction orderbook to MYR1.8bn by end-2014 from MYR1.2bn  at present, which  includes  the MYR230m  from  Phase  1  of  the  Sultan  Ahmad  Shah  Administrative  Centre  (see Figure  2).  This  implies  new  contracts  wins  of  at  least  MYR600 m  in  FY14. Management  guided  that these could potentially come from: i) Phase 2 of the  Sultan Ahmad  Shah  Administrative  Centre  as  mentioned  above,  ii)  infrastructure  work packages from the Rapid project in Pengerang (Johor), and iii) in-house building jobs from  its  property  projects,  particularly,  its  two  high-rise  residential  projects  in  the Klang Valley that are  slated for launch in 2H14. These are  the MYR331m  The LINQ @ Kinrara Uptown  and the MYR649m  Westlake.  To be prudent, we are keeping to our assumption of MYR500m new job wins in FY14.

Improving  sales  from  The  Peak.  AQRS  is  confident  that  the  take-up  rate  for  its MYR557m  high-rise  residential  project  in  Johor  Baru,  The  Peak,  will  hit  65-70% before  the  year  is  out,  vis-à-vis  about  36%  at  present.  Already,  the  project  has registered improved sales in 1Q14 vis-à-vis 4Q13 as the market gradually digests the property cooling measures introduced by the Government in late  2013. Also, AQRS last month managed to secure the release of  bumiputera  units amounting to 40% of the entire development  from the authorities. This allows  the company  to market the project more aggressively  to Singaporean buyers  and AQRS is planning road shows with  real  estate  agents  in  Singapore  next  month.  At  present,  foreigners, predominantly  Singaporeans,  make  up  about  50%  of  buyers  for  the  project’s  non bumiputera units.

To recap, the key selling points of  The Peak  –  comprising 668 units in two 38-storey blocks  –  are:  i)  its  direct  access  to  Singapore  via  the  newly  completed  Eastern Dispersal Link (EDL) – this makes it very attractive to Singaporean buyers  looking for weekend  homes  as  well  as  Malaysians  who  commute  between  Johor  Baru  and Singapore,  ii)  the  project’s  competitive  MYR650-660  psf  pricing  vis-à-vis  the  going rate in the vicinity of  above  MYR750  psf,  and iii)  the high ground the project sits on that translates into superb views for unit owners.

AQRS’ unbilled sales of MYR221.5m at present (of which about two-thirds come from The Peak), coupled with future sales from the project and the two high-rise residential projects in the Klang Valley  –  The LINQ @ Kinrara Uptown  and Westlake  –  that are slated for launch in 2H14,  will underpin the company’s  property profits over the next 2-3  years.  There  are  no  changes  to  our  property  EBIT  forecasts  of  MYR30m  per annum in FY14/15, which are equivalent to 51%/54% of AQRS’ total EBIT.

Forecasts.  Maintained.

Risks.  The risks include: i)  new contracts secured in FY14-15  coming in above our target  of  MYR500m  per  annum,  ii)  lower-than-expected  input  costs,  and  iii)  betterthan-expected property sales.Maintain SELL. The prospects for the construction sector are strong, underpinned by an extended upcycle driven by the MYR73bn Klang Valley MRT project, which will keep players busy until 2019. While AQRS is a good proxy to infrastructure spending in Malaysia,  given its involvement in the Klang Valley MRT project, it needs to grow its  earnings  significantly  to  justify  higher  valuations.  This  is  more  so  given  the potential EPS dilution of 18% (see Figure 3)  from its outstanding warrants, which are equivalent  to  45%  of  its  outstanding  shares.  FV  is  unchanged  at  MYR0.95  and  is 
based on a 10x fully-diluted FY14F EPS of 9.5 sen. This is in line with our benchmark 1-year forward target P/Es of 10-16x for the construction sector.

Financial Exhibits

SWOT Analysis

Company Profile
Gabungan AQRS is a construction company that operates only in Malaysia. It is also engaged in property development.

Recommendation Chart

Source: RHB