• Maintain BUY and MYR0.60 TP, 58% upside and c.5% yield. Gabungan AQRS was awarded a subcontract by Syarikat Muhibah Perniagaan Dan Pembinaan (SMPP) on 21 Mar 2022 worth MYR31.9m. The subcontract is for the execution and completion of sewer pipes relining works together with open excavation and pipe jacking works for Klang and Kuala Langat. Besides reducing dependency on infrastructure jobs, the company is also in the process of finalising several property development JVs that may be announced in 1H22, which could boost its GDV pipeline by MYR400m.

• Impact on orderbook. The subcontract works are planned to commence on 23 Mar 2022 and expected to be completed by 22 Mar 2024.This latest contract win brings AQRS’ latest outstanding orderbook to MYR1.2bn, translating into a orderbook/revenue cover ratio of 4.7x. In terms of profitability, management guided that net profit margin could be in the mid- double digit range. Assuming a net profit margin of 15%, earnings accretion for AQRS would be c.MYR1.8m, MYR2.4m and MYR0.6m for FY22F- FY24F based on our estimation.

• Our view. We gathered from management that AQRS was previously involved in piping works, amongst others, for the Light Rail Transit 3 (LRT3) and Sungai Besi Ulu Klang (SUKE) highway job awards. Given the prior experience that AQRS has in piping works, we envision minimal execution risk for this latest contract win. While the contract value of this award is less than MYR100m, the contract signals the company’s strategy to focus more on private jobs rather than public infrastructure jobs, which seem to have stronger competition. Aside from that, the latest contract win could solidify its footprint in piping works and open up more opportunities for such jobs. More importantly, such opportunities could serve as a buffer if works from the public infrastructure space does not see any significant pick-up in the medium term.

• Earnings and valuation. We make no changes to our FY22F-24F earnings as the latest contract win is within our FY22F job replenishment assumption of MYR500m. We are maintaining our target P/E for its construction segment in our SOP valuation from 8x, which is at a c.30% discount to the KLCON Index’s forward P/E to reflect the tough market competition in the construction space. Our unchanged target P/E is justified, given AQRS’ smaller market capitalisation of MYR201m. As such, our SOP-derived TP is maintained at MYR0.60 after ascribing a 4% ESG discount, consistent with our in-house ESG scoring methodology.

• Key downside risks: Failure to secure new contracts, a prolonged downturn in the construction sector and slower-than-expected take-up rate for the property segment.

Source: RHB Research - 22 Mar 2022