• BUY, MYR0.43 TP, 28% upside with 3% FY25F yield. Gabungan AQRS’9M24 core profit of MYR21m (-0.4% YoY) made up only 42% of our 18-month FY24 projection. The negative deviation was due to lower-thanexpected construction earnings. Plans to ease conditions of the “MalaysiaMy Second Home” scheme may underpin unit sales of its property project,The Peak, in Johor – which would be a key earning drivers post-Light RailTransit 3 (LRT3) in CY24/CY25, given its proximity to the Johor BahruSingapore Rapid Transit System Link (RTS Link) station in Bukit Chagar.

• Results review. Revenue of AQRS’ construction segment rose 4% YoY in9M23, contributed by LRT3 and E’Island Lake Haven, among others.However, due to certain projects which are still in the early stages (whichusually lead to low margins), the segment saw a 5% YoY contraction in corePBT for 9M23 – translating into a slightly lower core PBT margin of 8.1%(9M22: 8.9%). Meanwhile, core PBT of the property arm grew by 17% YoYin 9M23 amid higher sales volume for the E’Island Lake Haven project,which is 93% sold.

• AQRS has a MYR788m outstanding orderbook. This translates into a3.8x cover ratio, which is commendable. In fact, AQRS has managed topare down its debt by c.28% or MYR88m in 3Q23 from 1Q23 – implying alower net gearing ratio of 0.22x for the quarter (1Q23: 0.33x). Therefore,AQRS is on target to reduce its borrowings by at least MYR100m by theyear-end. Such headroom should enable the group to gear up for upcomingjobs, particularly as a subcontractor for anticipated major rail projects suchas Mass Rapid Transit 3. As for the property arm, earnings were backedby its unbilled sales of MYR280.9m, while future earnings later may comefrom AQRS’ JV with PR1MA Corp Malaysia to be a developer for a 100-acre township in Pahang (target launch in 1H24).

• Post results, we cut our 18MFY24/FY25/FY26 earnings estimates by 7-14%, taking into account a more conservative margin assumption for theconstruction projects. Nevertheless, we pare down our discount to RNAVfor the property segment to 65% from 70%, as the RTS Link station and theJohor Special Economic Zone may provide good visibility for The Peak(GDV: MYR603m) in Johor amid an anticipated improvement in crossborder traffic. As a net result, our SOP-derived TP of MYR0.43 isunchanged after baking in a 2% ESG discount.

• A catalyst for AQRS includes the rollout of the remaining phase of PanBorneo Highway Sabah that may benefit its 49%-owned precast business,SEDCO Precast. Contracts to supply precast components to this project arevalued at an estimated MYR400-500m. The formation of new propertydevelopment JVs by AQRS may also serve as a catalyst. Given the plethoraof catalysts, the stock is attractive – it is trading at -1SD and more than-2SD below its 5-year mean P/E and the Bursa Malaysia Constructionindex’s mean – which justifies our BUY call. Key downside risks: Failure tosecure new contracts and a downturn in the construction sector.

Source: RHB Securities Research - 30 Nov 2023