We maintain our SELL call and forecasts on Gabungan AQRS, but raise its  FV by 5% to  MYR1.00 as we roll forward our  valuation base year to FY15.  Its  1Q14  results  met  expectations  and  the  company  is  a  good proxy  to  infrastructure  spending  in  Malaysia,  given  its  involvement  in the Klang Valley MRT project. However, Gabungan AQRS needs to grow its earnings significantly to justify higher valuations.

• Strong  1Q14.  Gabungan  AQRS’  1Q14  net  profit  met  expectations  at 29%/27% of our/consensus full-year forecasts. On improved construction and property profits,  1Q14 net profit more than doubled from a washout a year ago.
• Good  job  flow  thus  far.  We  estimate  that  Gabungan  AQRS  has secured ~MYR350m  new jobs YTD including  Phase 1 of the MYR230m Sultan Ahmad Shah Administrative Centre (SASAC) () and the MYR43m substructure  works  for  Tropicana  Metropark,  Subang  Jaya.  At  present, its outstanding construction orderbook stands at MYR1.24bn (see Figure 2). During  an analyst briefing in March,  the company  guided for a strong contract  pipeline for the rest of the year  as well  with potential jobs like: i) Phase  2  of  SASAC,  ii)  infrastructure  work  packages  from  the  refinery and petrochemical integrated development (RAPID) project in Johor, and iii) in-house building jobs from its property projects.
• Risks.  These  include:  i)  construction  contract  wins  in  FY14-15 exceeding MYR500m per annum  (we assume), ii)  lower  input costs, and iii) better demand for its property launches.
• Maintain  SELL.  The  prospects  for  the  construction  sector  are  strong, underpinned by the MYR73bn Klang Valley MRT project, which will keep players  busy  until  2019.  While  Gabungan  AQRS  is  a  good  proxy  to infrastructure spending given its involvement in the MRT project, it needs to grow its earnings significantly to justify higher valuations  –  more so, given the potential massive EPS dilution from its outstanding warrants equivalent to 45% of its outstanding shares.  Our  FV is  raised by 5% to MYR1.00 (from MYR0.95) as we roll forward our valuation base year to FY15 (from FY14). Our FV is based on  a 10x fully-diluted FY15  EPS of 10  sen  (see Figure 3),  in line with our benchmark 1-year forward target P/Es of 10-16x for the construction sector.

Source: RHB