• Maintain BUY and MYR0.46 TP, 61% upside with c.4% yield. We recently visited Gabungan AQRS’ Light Rail Transit 3 (LRT3) project site and came away feeling positive in our outlook. The possible formation of new property development JVs and potential introduction of Johor’s own Malaysia My Second Home scheme – which may underpin unit sales of its property project in Johor, The Peak (estimated GDV: MYR603m) – should serve as key earnings drivers post LRT3. This counter is trading at an attractive 3.5x FY23F P/E, with a 3-year earnings CAGR of >20%.

• LRT3 details. AQRS secured a MYR710m job (initial value of MYR1.1bn prior to revision in Jul 2018) in Oct 2017 from Prasarana for the GS04 package of LRT3, which entails a 4.5km railway line with two stations (Shah Alam Stadium and Glenmarie). AQRS’ progress for LRT3 as at end Dec 2022 was at c.75%, with a target completion timeline by 4Q23.

• LRT3 prospects. In Jul 2018, when the total LRT3 cost was revised to MYR16.6bn from MYR31.7bn, six stations including the Temasya Station under AQRS’ GS04 package were cancelled. Nevertheless, Prasarana had approached Malaysian Resources Corp (MRC MK, BUY, TP: MYR0.45) in 4Q22 regarding the potential reinstatement of the five previously axed stations (Persiaran Hishamuddin Station not included). The LRT3 project is estimated to contribute c.MYR82m in net operating cash flow until FY25F, excluding any potential reinstatement works for Temasya station which could bring a total job value of MYR100-200m for AQRS to its outstanding orderbook of MYR956m (4.6x cover ratio) as at end FY22.

• Outlook. AQRS has submitted variations of price claims for its infrastructure projects totalling MYR22m. It is also submitting claims for additional costs incurred during the various MCOs. Positively, these costs have already been incurred and recognised, and any successful claims should directly contribute to earnings. Last year, AQRS was also successful in receiving a total of MYR26m in loss and expense claims for its PR1MA Gambang project. Subsequently, it entered into a JV agreement with PR1MA Corp Malaysia, to be a developer of the 100-acre landed township (estimated GDV: MYR336m, target launch 1HFY24). The aforementioned developments could keep AQRS busy in the coming years and buffer any downside risks from the public infrastructure space.

• Post site visit, we make no changes to FY23-25F estimates. As such, our SOP-derived TP remains at MYR0.46 after ascribing a 2% ESG discount, consistent with our in-house ESG scoring. An upcoming catalyst for AQRS is the Pan Borneo Highway (PBH) Sabah project that may benefit its 49%-owned precast business (SEDCO Precast). Contracts to supply precast components to PBH Sabah are valued at an estimated range of MYR400-500m. The formation of new property development JVs by AQRS may also serve as a catalyst for the stock.

• Key downside risks: Slowdown in the property market and an unexpected shortage of manpower.

Source: RHB Research - 15 Mar 2023