• Keep BUY, with new MYR0.43 TP from MYR0.40, 33% upside and c.3% FY24F (Jun) yield. 6M24 core profit of MYR14m (-0.4% YoY) missed estimates – accounting for 24% of our 18-month FY24F. The negative deviation was from higher-than-expected cost of sales. The potential review of the “Malaysia My Second Home” programme may underpin unit sales of its property project, The Peak, in Johor Bahru – serving as a key earnings driver post-Light Rail Transit 3 (LRT3) in CY24-25.

• Results review. Gabungan AQRS’ construction segment saw a 28% YoY jump in core PBT for 6M24 – translating into a higher core PBT margin of 4.9% (1H22: 4.3%). This was mainly contributed by higher progress billings from LRT3, E’Island Lake Haven, the Bandar Enstek School and the Pusat Pentadbiran Sultan Alam Shah projects. Likewise, core PBT of the property segment grew by 23% YoY in 6M24 amid higher sales volume for the E’Island Lake Haven project which is 92% sold.

• AQRS has a MYR908m outstanding orderbook (4.4x cover ratio vs peer average of 4x). Project-related borrowings, ie for LRT3 are at the peak of the S-curve and have begun decreasing from 2Q23 – reducing financing costs in the coming quarters. In fact, the company has managed to pare down its debt by MYR49m or 19% in 2Q23 from 1Q23 – translating into a net gearing ratio of 0.22x for the quarter (1Q23: 0.33x). Hence, it is on target to reduce its borrowings by a total of MYR100m by year end. As for the property segment, earnings are backed by its unbilled sales of MYR300.3m while future earnings may come from the JV with PR1MA Corp Malaysia to be a developer for a 100-acre township in Pahang (target launch in 2QCY24).

• Post results, we cut our FY23-25F earnings by 7-12%, taking into account a lower job replenishment target and higher cost assumptions. Nevertheless, we are lowering our discount to RNAV for the property segment to 70% from 75% – considering that the Johor Bahru-Singapore Rapid Transit System (RTS) Link may provide good visibility for The Peak (GDV: MYR603m) in Johor Bahru amid the project’s close proximity to the RTS and improvement in cross border traffic. As a result, we arrive at a new SOP-derived TP of MYR0.43 (from MYR0.40) after ascribing a 2% ESG discount, consistent with our in-house ESG scoring.

• A catalyst for AQRS includes the rollout of the remaining phase of the Pan Borneo Highway Sabah that may benefit its 49%-owned precast business (SEDCO Precast). Contracts to supply precast components to the said project are valued at an estimated range of MYR400-500m. The formation of new property development JVs by the company may also serve as a catalyst for the stock. Given the plethora of catalysts, the stock trading at an attractive 3.9x FY24F P/E (-1SD below its 5-year mean) – hence, our BUY call. Key downside risks: Failure to secure new contracts and a downturn in the construction sector.

Source: RHB Securities Research - 24 Aug 2023