• Maintain BUY, new MYR0.50 TP from MYR0.55, 56% upside with c.3% FY22F yield. Gabungan AQRS’ 1H22 results missed our and Street expectations, with numbers that made up only 34% and 36% of full-year estimates. The negative deviation was mainly due to the slower-than- expected progress billings of the construction segment. Nevertheless, substantial unbilled sales together with better labour conditions ahead should support the group’s earnings growth.

• Results review. Despite underperforming forecasts, AQRS’ 1H22 core net profit rose >50% YoY to MYR14.7m. The lower-than-expected in earnings came from the construction segment which saw a 23% YoY drop in PAT in 1H22, due to the seasonally slower period (Aidil Fitri and Ramadhan), coupled with some impact from the nationwide labour shortage. Nevertheless, this was offset by the property development division, which recorded a significant surge in PAT of more than 50% 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. Earnings for its property development segment should be supported by its unbilled sales of MYR364.1m as at 30 Jun 2022 (30 Jun 2021: MYR324.5m). Its manageable net gearing ratio of 0.29x as at 30 Jun 2022 should also enable the company to gear up for larger jobs, With that in mind, we do not discount the possibility of a tier-2 level exposure towards the Mass Rapid Transit 3 (MRT3) project, given its credentials in the Light Rapid Transit (LRT3) project. Therefore, a major rerating catalyst is its potential of being awarded with new infrastructure projects, ie being involved in the MRT3 job as a subcontractor.

• Earnings and valuation. Post results, we cut FY22-23F earnings by 14% and 7% but raise FY24F earnings by 10%, as we bake in a more conservative revenue recognition timeline for its progress billings of construction projects. We understand that AQRS plans to directly hire foreign workers, in addition to its current arrangement of employing more subcontracted labourers in the coming months. This shall enable it to ramp up progress at construction sites in the remaining months. Our target P/E for its construction segment in our SOP valuation is unchanged at 8x, in view of its smaller market capitalisation of MYR169m. As such, our SOP- derived TP is now MYR0.50 post results adjustment and 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 - 24 Aug 2022