• Maintain BUY, new MYR0.55 TP from MYR0.54, 67% upside with c.6% FY22F yield. We remain positive on Gabungan AQRS, as higher intensity of construction projects together with high unbilled sales should support the group’s earnings visibility ahead. Valuations are undemanding – the stock is trading at a forward P/E of 3.3x, at -1.5SD from the 5-year mean. A major rerating catalyst is its potential of being awarded new infrastructure projects, ie Mass Rapid Transit 3 (MRT3) as a subcontractor.

• Construction arm. Projects such as the Light Rail Transit 3 (LRT3) are going into higher intensity (on an S-curve) and, as such, may lead to higher contribution in coming quarters. While AQRS is facing a labour shortage, the situation is not to the point that materially hampers the construction progress at sites. Also, the arrival of foreign labour via subcontracts could take place in the coming months. AQRS has c.MYR1.1bn worth of outstanding construction orders, which gives it earnings visibility over the next three years. Its lower net gearing ratio of 0.3x as at end 1Q22 (end- 1Q21: 0.37x) should enable it to gear up for larger jobs, especially in infrastructure. With that in mind, we do not discount the possibility of a tier- 2 level exposure towards the MRT3, given its record in the LRT3 project.

• Property development arm. AQRS’ property sales have been healthy, reaching MYR22.6m from 1 Apr to 12 Jun for 2Q22, compared to MYR15.6m in 1Q22 – based on presentation slides from the AGM. Aside from that, the company’s E’Island Lake Haven project in Putra Perdana, Selangor has seen a commendable take-up rate of c.77% (as at 12 Jun 2022), from 69% as at Dec 2021. For other projects such as The Peak in Johor, the take-up rate has reached 41%, and could gain pace later on as the construction of the Singapore-Johor Bahru Rapid Transit System (RTS Link) progresses, with a targeted commencement date on 1 Jan 2027.

• 2Q22 results preview. Considering the aforementioned points, we expect 2Q22 core net profit to grow to >MYR5m. In 2Q21, AQRS recorded a core net profit of MYR3.6m (>50% YoY), backed by higher construction work progress compared to a total halt in activity in 2Q20 as a result of pandemic- related movement restrictions.

• ESG considerations. AQRS has a total workforce of 325 people, of which 32% of employees are women, with 27% representation of women in middle management. We also gathered that AQRS did not carry out any downsizing of its staff, notwithstanding the current environment. As such, we lift our ESG scoring to 2.9 from 2.8 for the said ESG efforts.

• Earnings and valuation. We make no changes made to our earnings estimates. Our target P/E for its construction segment in our SOP valuation is unchanged at 8x, given its smaller market capitalisation of MYR180m. As such, our SOP-derived TP ticks up to MYR0.55 (from MYR0.54) after ascribing a 2% ESG discount (from 4%), in line with our in-house ESG scoring methodology. Key downside risks: Failure to secure new contracts and a prolonged downturn in the construction sector.

Source: RHB Research - 12 Aug 2022