Investment Merits

• A unique, niche business that benefits from the “go green” initiative

• STREAM AWCS is an internationally recognised brand with presence in Malaysia, Singapore, Hong Kong & Abu Dhabi

• Strong outstanding orderbook of MYR1.15bn as at 1 Jan 2017, and strong potential for new contracts, especially STREAM projects and facilities management

Company Profile

AWC is an investment holding company that provides integrated facilities management (IFM) and engineering services, specialising in quality engineering services. The company provides total asset management services such as integrated facilities management and engineering services to building owners. It is also an international leader in the design and supply of automated pneumatic waste collection system (AWCS) with a proven track record in Malaysia, Singapore and Middle East. Known for harnessing new technology, AWC is at the forefront of green building services offering energy management solutions.

Highlights

Solid facilities management division. Prospects at the facilities management division remain solid with recently-renewed concessions to provide IFM to the Southern Region (comprising states of Johor, Malacca, Negeri Sembilan) and Sarawak state building. We believe the concessions would provide a stable stream of revenue in the facilities segment for the next 10 years, with the company receiving MYR52m pa for the first five years, followed by MYR59m pa for the remaining five years. As the company also carries out IFM work under the commercial and healthcare segment, we believe the segment would continue to account for 39-43% of FY17-FY19 revenue.

Huge potential in environment. In the environment division, AWC elevated itself as one of the market leaders for waste collection system under the brand STREAM. This division has more than doubled in FY16, due to improvements in all the geographical regions (Malaysia, Singapore UAE and Hong Kong). Significantly, the STREAM system has been installed in the underground areas of Al Raha beach. As the beach area is currently only 15% occupied, AWC is expected to pull over MYR150-200m worth of contracts over the next 10 years. Similarly, in Singapore, the Housing & Development Board has made it compulsory to have the AWCS installed in all its future buildings as well as its old buildings that going through major renovations. We expect AWC to continue to benefit from strong demand for AWCS in the future.

Plumbing & rainwater harvesting expert. The engineering division has recently expanded with the completion of the acquisition of two new companies, namely Qudotech Sdn Bhd (Qudotech) and DD Techniche Sdn Bhd (DDT). After the acquisitions, Qudotech managed to secure close to MYR100m worth of contracts for plumbing works. These include some high profile projects such as KL118 Tower, The Astaka, Iskandar Malaysia, Puteri Cove Residences, The Sentral Residence and Signature Tower, Tun Razak Exchange. We expect plumbing and rain water harvesting to provide synergies to AWC and present crossselling opportunities to win more contracts.

Company Report Card

Strong orderbook. Revenue in 1HFY17 rose 46% while profit expanded by a greater 113%. We expect results to continue to be strong, driven by a large outstanding orderbook of MYR1.15bn as at 1 Jan 2016 with approximately MYR428m to be recognised up to 30 Jun 2018. We expect STREAM to continue to gain momentum from securing contracts for high profile developments in Malaysia, Singapore, Hong Kong and Abu Dhabi

Balance sheet/cash flows. The company has been in a net cash position for many years given management’s prudent balance sheet approach. As at Dec 2016, AWC was able to maintain its strong net cash position of MYR86.4m

ROE. AWC recorded double-digit ROE in FY16 due to higher contributions from the environmental division that commands better margins.

Dividend. Despite having no fixed dividend policy, AWC paid 2.5 sen of dividend in FY16 translating to a dividend payout of 32.8%. We expect a payout ratio of at least 20% going forward.

Management. All three divisions are helmed by three different managing directors (MDs)/CEOs with more than 20 years of experience in their respective areas. The group is led by its MD, Dato’ Ahmad Kabeer, who is also the largest shareholder in the company.

Recommendation

Pegging the stock to 11x 2018 P/E, we arrive at a fair value of MYR1.37. We like AWC for its huge potential in the environmental division and the company’s strong outstanding orderbook of MYR1.15bn. We believe the company deserves to trade at 11x P/E, which is its 3-years P/E average.

Source: RHB Securities Research - 5 May 2017