Investment Merits

• Low-hanging fruit from the acquisition of Stream Group (Stream)
• Leading the charge in providing automated waste collection
• Looking towards Indonesia and Saudi Arabia for bigger opportunities
• Healthy balance sheet and below-peer valuations

Company Profile

AWC is a prominent Malaysian integrated facilities management and engineering services conglomerate that has established itself as a leader in sustainability and infrastructure solutions. It has a diversified portfolio of businesses that cater to a broad spectrum of industries, both domestically and regionally. It operates four divisions – facilities (48.7% of FY23 (Jun) revenue), engineering services (19.4%), environment (26.4%), and rail (5.5%).

Highlights

Transforming Stream into a profit powerhouse. Stream, a global leader in automated waste collection systems (AWCS), is committed to providing the most advanced and green solutions. With two consecutive years of profits surpassing AWC's, the full acquisition of Stream (from a 51% stake previously) ensures complete profit consolidation, elevating the green division as AWC's leading profit generator (65.5% of FY25F core profit). Stream is set to capitalise on global trends related to smart cities and cleaner living environments, and benefits from favourable government policies and the increased global adoption of AWCS (2024- 2030F CAGR: 10.3%).

From Al Raha to Nusantara and Neom. Stream has a globally recognised track record, having completed 181 metres of AWCS infrastructure for the Al Raha project in Abu Dhabi (excluding subplots) in 2017. This project spanned 1,380 acres, making it one of the largest AWCS deployments worldwide. Looking ahead, AWC aims to secure contracts for AWCS installations in Nusantara, Indonesia, and Neom, Saudi Arabia. Both mega projects make AWCS infrastructure compulsory, with Nusantara covering an area of over 600,000 acres and Neom spanning over 6.5m acres – more than 400 and 4,700 times larger than Al Raha.

High adoption of AWCS by property developers and Singapore Housing & Development Board (HDB). Developers see AWCS as a better solution than conventional garbage trucks, as it saves transportation time by building a central waste handling facility (CWHF) and avoids leachate spillage caused by the loading and unloading of garbage. Meanwhile, Singapore has mandated AWCS as the waste solution for HDB and private housing projects exceeding 500 units. With strong market shares in Malaysia (90%) and Singapore (20%), AWC has solidified its position as a dominant force in the waste industry.

Robust orderbook and tenderbook. Stream, as well as AWC’s engineering division – which specialises in plumbing services in Malaysia and mechanical & engineering (M&E) services in Singapore – should benefit from developments in the construction and property sectors. The rail division, bolstered by its strong track record, stands to gain from the revival of major infrastructure projects in Malaysia. With an outstanding orderbook of MYR800m and a substantial tenderbook exceeding MYR1.2bn as of 18 Apr, AWC enjoys strong earnings visibility and growth prospects.

Company Report Card

Results highlights. AWC recorded a commendable QoQ performance, with revenue increasing by MYR27.9m or 31.5% to MYR116.8m in 2QFY24, from MYR88.8m in 1QFY24. This was mainly due to a substantial increase in revenue recognition from its facilities and rail divisions. Overall, it recorded a higher PBT of MYR10.4m in 2QFY24 compared to MYR3.8m in 1QFY24, representing an increase of MYR6.6m or >100% QoQ. This was after taking into account non-recurring costs associated with the acquisition of the remaining 49% holdings in Stream (MYR1.4m), and includes professional fees as well as stamp duties.

Strong net cash position. AWC has a healthy balance sheet, with net cash of MYR77.7m as at 31 Dec 2023. The company should remain in a net cash position over FY24-25F.

Dividends. Although there is no dividend policy, the group has been consistently paying dividends for the past eight fiscal years, with a 25% historical average payout ratio. As AWC intends to pare down its borrowings – used to acquire Stream – we assume a dividend payout of 22%.

Management. AWC is led by Dato’ Ahmad Kabeer Bin Mohamed Nagoor, its CEO since 2013. He has more than 20 years of experience in the facility management industry, and has contributed significantly to the company’s success. He is also a major shareholder.

Investment Case

Undemanding valuation. AWC is at the forefront of green technology via Stream, showcasing Malaysia's ability to provide innovative AWCS – capitalising on global sustainability and smart urbanisation trends. With an orderbook that is double its FY23 revenue, AWC ensures steady earnings ahead, amidst a backdrop of global mega-development and dynamic construction projects, and due as well to its services to local healthcare facilities. Its commitment to sustainability via Stream makes it a compelling investment, with an attractive FY24F PEG of 0.2x. Based on an ascribed 16-20x P/E on FY25F earnings, we derive a FV range of MYR1.49-1.86. We believe this is fair, as it is still at a discount to the valuations of other facilities management and waste management players.

Key risks include project delays, rising input costs, a slow pick-up in green technology, and receivables impairment risk.

Source: RHB Securities Research - 15 May 2024