• Maintain BUY, new MYR0.54 TP from MYR0.60, 64% upside with c.6% FY22F yield. Gabungan AQRS’ 1Q22 results missed our and Street expectations, with numbers that made up only 18% and 19% of full-year estimates. The negative deviation was mainly due to the slower-than- expected performance of the construction segment. Nevertheless, higher intensity of construction projects ahead, combined with substantial unbilled sales, should support the group’s earnings moving forward.

• Results review. Despite underperforming our and Street estimates, AQRS’ 1Q22 core net profit of MYR8.9m rose 97.7% YoY. The drag in earnings came from the construction segment, which led to revenue plunging 35.2% YoY. This, in turn, was due to lower work progress for the Sungai Besi-Ulu Kelang Elevated Expressway (SUKE) project, which is near completion. Nevertheless, this was offset by the property development division which recorded a significant surge in revenue and PBT of more than 100% YoY. This was attributable to the higher work progress achieved, as well as the higher take-up rate (reaching 75%) for the E’Island Lake Haven project.

• Outlook. The earnings visibility of AQRS’ construction segment is backed by MYR1.1bn worth of orders, which translate into an orderbook/revenue cover ratio of c.3x, with a job replenishment target of MYR500m for FY22. Its lower net gearing ratio of 0.3x as at end 1Q22 (end-1Q21: 0.37x) should enable the company to gear up and bid for larger jobs, especially in infrastructure. As for its property development segment, earnings would be supported by its unbilled sales of MYR360.4m as at end-1Q22 (end-1Q21: MYR266.3m). Further catalysts may come from AQRS’ finalisation of several property development joint ventures that are expected to be concluded by 1Q22 – which should boost its total GDV pipeline by MYR400m.

• Earnings and valuation. Post results, we cut FY22-24F earnings by 14%, 5% and 4% to reflect our conservative assumption on the high cost of building materials. While 1Q22 core net profit makes up only 21% of our revised earnings estimates, projects such as Light Rail Transit 3 and E’Island Lake Haven are going into higher intensity (on an S-curve) – and these should contribute more in the coming quarters. At the same time, we roll forward our valuation base to FY23. Our target P/E for its construction segment in our SOP valuation is unchanged at 8x, given its smaller market capitalisation of MYR177m. As such, our SOP-derived TP is now MYR0.60 after ascribing a 4% ESG discount, in line with our in-house ESG scoring methodology.

• Key downside risks: Failure to secure new contracts and a prolonged downturn in the construction sector.

Source: RHB Research - 26 May 2022