• BUY, with new MYR0.40 TP, 51% upside, c.3% yield. Gabungan AQRS’ 1Q23 core profit of MYR6.7m (-15% YoY) missed estimates – accounting for 17% of our and Street CY23 projections. The negative deviation was due to higher-than-expected cost of sales. The possible formation of new property development JVs and potential introduction of Johor’s own Malaysia My Second Home scheme – which could underpin unit sales of its property project in Johor, The Peak (estimated GDV: MYR603m) – might serve as key earnings drivers post-Light Rail Transit 3 (LRT3).

• Results review. AQRS’ construction segment saw a 75% YoY jump in core PBT for 1Q23 – translating into a higher core PBT margin of 7.5% (1Q22: 5.7%). This was mainly contributed by LRT3, E’Island Lake Haven, and the Pusat Pentadbiran Sultan Alam Shah projects. Likewise, the property arm’s PBT grew 9% YoY amid higher sales volume for the E’Island Lake Haven project, which is 90% sold.

• AQRS has a MYR884m outstanding orderbook (4.3x cover ratio vs peer average of 3x). Project-related borrowings, ie for LRT3, are at the peak of the S-curve and expected to gradually decrease from 2Q23 onwards – reducing financing costs in the coming quarters. As for the property arm, earnings are backed by its unbilled sales of MYR338.4m while future earnings may come from AQRS’ JV with PR1MA Corp Malaysia to develop a 100-acre township in Pahang (target launch: 1HCY24).

• Earnings estimates. With AQRS having changed its financial year-end to June (from December), we now expect the 18-month fiscal year period to report earnings of MYR58m after lowering our annualised earnings forecast by 13% and our FY25 numbers by 14%. This is after taking into account a more conservative earnings recognition timeline for its construction projects and tweaking our cost assumptions slightly upwards. We also introduce our FY26 estimate of MYR56m. Post earnings adjustment and rollover of our valuation base year to CY24 from CY23, we arrive at a new SOP-derived TP of MYR0.40 (from MYR0.46) after ascribing a 2% ESG discount – consistent with our in-house ESG scoring.

• A catalyst for AQRS includes the rollout of the remaining phase 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 MYR400-500m. The formation of new property development JVs by AQRS may also serve as a catalyst for the stock. Given the plethora of catalysts, the stock is trading at an attractive 2.3x FY24F P/E (-2SD below its 5-year mean). Key downside risks: Failure to secure contracts and a downturn in the construction sector.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 25 May 2023