• Stay BUY, TP rises to MYR0.48 from MYR0.43, 37% upside with c.3% yield. Gabungan AQRS’ 12MFY24 (Jun) core profit of MYR28m (+5% YoY) met our estimate, at 66% of our 18-month FY24 projection. The group’s track record for Mass Rapid Transit 1 and Light Rail Transit 3 (LRT3) may put it in a strong position to win upcoming rail projects as a sub-contractor. The group’s property project in Johor Bahru, The Peak (GDV: MYR603m), may see further visibility due to its proximity with the Johor Bahru-Singapore Rapid Transit System Link (RTS Link) station.

• PBT of AQRS’ construction segment surged by >100% YoY in 12MFY24 contributed by LRT3 and E’Island Lake Haven, among others. As such, the core PBT margin for the construction unit expanded to 8.2% in 12MFY24 from 3.1% in the same period a year ago. Meanwhile, the core PBT of the property arm dropped by 21% YoY in 12MFY24 amid the E’Island Lake Haven project (94% sold) which is nearing completion in 2024.

• AQRS has a MYR516m outstanding orderbook. This implies a 2.5x cover ratio – which we view as reasonable at this juncture, as job awards have yet to pick up. Near-term job wins may stem from clinching a contract from one of the five LRT3 stations planned for reinstatement. Importantly, AQRS pared down its debt by c.16% or MYR49m from 1Q23 until 4Q23 – translating into a lower net gearing ratio of 0.28x in 4Q23 (1Q23: 0.33x). Such headroom may enable the group to gear up for the upcoming jobs, particularly as a subcontractor for anticipated major rail projects such as Mass Rapid Transit 3. Meanwhile, its property segment’s earnings are backed by unbilled sales of MYR252m while future earnings may come from the Gambang Residensi project in Pahang which has a c.MYR350m GDV (target launch in 2H24).

• No changes to our earnings estimates as results met expectations. However, we ascribe a higher target P/E of 10x (from 8x) to the group’s construction arm amidst its strong potential to be a beneficiary of upcoming infrastructure projects. As such, our SOP-derived TP increases to MYR0.48 from MYR0.43, and includes a 2% ESG discount.

• A catalyst for AQRS includes the rollout of Phase 1B of Pan Borneo Highway Sabah that may benefit its 49%-owned precast business (SEDCO Precast). Contracts to supply precast components to this project are valued at an estimated MYR400-500m. The formation of new property development JVs by AQRS (on top of Gambang Residensi) may also serve as another catalyst. Given these two factors, the stock is attractively valued – it is now trading below -2SD from the 5-year mean P/E and the Bursa Malaysia Construction index’s mean P/E – which justifies our BUY call.

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

Source: RHB Research - 29 Feb 2024