• Keep BUY with new MYR0.50 TP (from MYR0.48), 41% upside, c.3% yield. Gabungan AQRS’ 15MFY24 (Jun) core profit of MYR32m missed our estimates – accounting for 76% of our 18-month FY24 projections. The negative deviation was due to the weaker-than-expected construction segment. Aside from the track record in previous infrastructure rail projects, 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.

• AQRS’ construction segment recorded a loss-before-tax of MYR4.1m in 5QFY24 (or 1QCY24) vs a PBT of MYR6.3m and MYR5m in 1QCY23 and 4QCY23. This was due to an additional cost incurred for one of its construction project. Meanwhile, the PBT of the property arm doubled in 5QFY24 to reach MYR5.6m compared to MYR2.8m a year ago due to the E’Island Lake Haven project (94% sold) which will be completed in CY24.

• AQRS has a MYR468m outstanding orderbook – this translates into a 2x cover ratio which we view is 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 LRT 3 stations planned for reinstatement. Importantly, AQRS has managed to pare down its debt by c.MYR41m from 1QCY23 until 1QCY24 – translating into a lower net gearing ratio of 0.30x in 1QCY24 (1QCY23: 0.33x). Such headroom shall enable the group to gear up for the upcoming infrastructure jobs. As for the property arm, earnings are backed by its unbilled sales of MYR237m while future earnings later may come from the Gambang Residensi project in Pahang with a c.MYR350m GDV (target launch in late 2H24).

• We cut our FY24F-26F earnings by 8-13% as we impute a more conservative margin assumption and billing timeline for the construction arm. We also take the opportunity to roll forward our valuation base year to CY25 from CY24. The net effect of these adjustments brings us to a new SOP-derived TP of MYR0.50 (previously MYR0.48) after baking in a 2% ESG discount.

• A catalyst for AQRS includes the rollout of the phase 1B of 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 MYR400m-500m. The formation of new property development JVs by AQRS (on top of Gambang Residensi in Pahang) may also serve as a catalyst. Given the plethora of catalysts, the stock is attractive – trading at more than -2SD below its 5-year mean P/E and the Bursa Malaysia Construction index’s – hence, our BUY call.

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

Source: RHB Research - 30 May 2024