• BUY, new MYR0.46 SOP-derived TP from MYR0.50, 64% upside, c.4% FY22F yield. Gabungan AQRS’ 9M22 results missed our and Street’s expectations, making up only 59% and 62% of full-year estimates. The negative deviation was mainly due to higher finance costs and lower-than- expected other income. Nevertheless, substantial unbilled property sales and better labour conditions should support earnings moving forward.

• Results review. Despite underperforming forecasts, AQRS’ 9M22 core net profit rose 94% YoY to MYR21.8m. On further scrutiny, 3Q22 recorded core net profit of MYR7.1m (>100%YoY) backed by the construction segment which saw a >50% YoY gain in PBT – contributed by the Sungai Besi Ulu Kelang (SUKE), Light Rail Transit 3 (LRT3), E’Island Lake Haven, and Teringin Sentral construction projects. The property development division saw a 54% YoY increase in core PBT (excluding liquidated ascertained damages) to MYR3.7m (3Q21: MYR2.4m), from the higher work progress achieved and strong 85% take-up rate for the E’Island Lake Haven project.

• Outlook. The construction segment’s earnings visibility is backed by MYR1bn worth of orders, which translate into an orderbook/revenue cover ratio of c.3x. AQRS has won MYR98m worth of new jobs YTD vs our FY22 replenishment target of MYR400m. Meanwhile, earnings for its property development segment should be supported by unbilled sales of MYR361.1m as at 30 Sep (30 Sep 2021: MYR356.4m). Its manageable net gearing ratio of 0.27x as at 30 Sep should also enable it to gear up for larger jobs. With that in mind, we do not discount the possibility of a tier-2 level exposure to the Mass Rapid Transit 3 (MRT3) given its credentials in the Light Rapid Transit (LRT3) project (expected rollout between 2Q23 and 3Q23). Therefore, a major rerating catalyst is its potential of securing new infrastructure projects, such as an MRT3 job as a subcontractor.

• Earnings and valuation. Post results, we cut FY22-24F earnings by 14%, 6%, and 8%. This follows a downward revision in the new job wins target from MYR400m to MYR250m for FY22, MYR400m to MYR300m for FY23, and MYR500m to MYR400m for FY24. We understand that AQRS plans to directly hire foreign workers in addition to its current arrangement of employing more subcontracted labourers in the coming months. This should ensure better progress at construction sites in the quarters ahead. Our target P/E for its construction segment in our SOP valuation is unchanged at 8x, given its smaller market capitalisation of MYR155m. As such, our SOP-derived TP is now MYR0.46 post results adjustment and after ascribing a 4% ESG discount, in line with our in-house methodology.

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

Source: RHB Research - 1 Dec 2022