• Keep BUY and MYR0.46 TP, 44% upside, c.3% yield. Gabungan AQRS’ FY22 core earnings met our and Street’s estimates, accounting for 97% and 101% of full-year projections. Key drivers for FY23 earnings would be higher progress billings for the Light Rail Transit 3 (LRT3). We also expect variation of price claims from the Government for the LRT3 and Pusat Pentadbiran Sultan Ahmad Shah (PPSAS) projects worth at least MYR10m, which should help sustain margins. Valuations are undemanding with the stock trading at >-2SD from the KLCON index’s 5-year mean P/E.

• Results review. AQRS posted >50% YoY core earnings growth for FY22 underpinned by its property development arm, which recorded PBT of MYR16.8m for the year vs an LBT of MYR11.3m in FY21. The segment’s improved performance was attributed to higher property sales, particularly in the E’Island Lake Haven project, which saw an 87% take-up rate. The construction segment’s PBT margin contracted to 2.3% in FY22 from 10% in FY21 as the group recognised additional costs for one of its projects. Nevertheless, these costs could be written back in the future, pending negotiations with the client.

• Looking ahead. AQRS’ earnings visibility is backed by its MYR956m construction orderbook which gives an orderbook-to-revenue cover ratio of 3.4x. The potential reinstatement of LRT3’s previously omitted jobs for five stations (estimated price tag of MYR750-1,000m) could serve as a plausible opportunity, given the group’s current involvement in the project via the MYR1.1bn GS04 package awarded in Oct 2017 (expected completion 4Q23). In the longer term, AQRS’ JV with PR1MA Corp Malaysia (PR1MA) to develop a residential project in Kuantan, Pahang (estimated GDV: MYR336m with 1,065 units) likely to be launched in 1H24, is expected to have higher margins compared to if AQRS was just a contractor. The project will span seven years and contribute up to MYR10-15m pa during its peak progress. All in, these projects could keep AQRS busy in the coming years and buffer any downside risks from the public infrastructure project space.

• Earnings and valuation. Post results, we make no changes to FY23-24F earnings, as earnings met expectations. At the same time, we introduce our FY25F earnings estimates with an annual job replenishment target of MYR300m. As such, our SOP-derived TP stays at MYR0.46 after ascribing a 2% ESG discount, consistent with our in-house ESG methodology. An upcoming catalyst for AQRS is the Pan Borneo Highway (PBH) Sabah project that may benefit its 49%-owned precast business (SEDCO Precast). We gathered that contracts to supply precast components to PBH Sabah will be worth at least MYR200m.

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

Source: RHB Research - 23 Feb 2023