This article first appeared in The Edge Financial Daily on May 23, 2018

AWC Bhd
(May 22, 78.5 sen)
Maintain add with a lower target price (TP) of RM1: Nine-month financial year 2018 (9MFY18) revenue was flat at RM209.8 million (-0.2% year-on-year [y-o-y]), as higher contribution from facilities division was offset by lower contribution from engineering and environment divisions. As the facilities unit have weaker margins versus other units, 9MFY18 earnings before interest, taxes, depreciation and amortisation margin slipped 2.4% points y-o-y to 14.9%. However, 9MFY18 core net profit rose to RM15.5 million (+14.2% y-o-y), thanks to lower depreciation charges and higher interest income. 9MFY18 net profit was in line at 72.9% of our financial year 2018 forecast (FY18F), but below consensus’ (68%).

On a quarter-on-quarter (q-o-q) basis, AWC reported a stronger 3QFY18 performance. While 3QFY18 revenue rose 10.1% q-o-q, 3QFY18 core net profit surged 39.6% q-o-q to RM6.7 million, after adjusting for one-off gains of RM200,000. The stronger q-o-q performance was due to higher contribution from all three divisions, better cost control, and stronger economies of scale. Also, 3QFY18 Ebitda margin expanded 8.1% points q-o-q to 17.1%.

We expect AWC Bhd to begin consolidating contribution from its 60% stake in Trackworks Sdn Bhd by June 2018. To recap, AWC paid RM43.5 million for its stake, valuing the company at 8.1 times calendar year 2018 forecast (CY18F) price-earnings ratio (PER) (based on profit guarantee of RM8 million for FY18F and RM12 million for FY19F). Currently, Trackworks has an outstanding order book of RM120 million for the next two years, which is mainly rail-related supply and installation works.

We estimate that as at end-March 2018, AWC’s total outstanding order book (ex Trackworks) was at RM358.1 million, sufficient for the next two years, comprising RM184.2 million facilities works, RM94 million engineering works, and RM79.9 million for Stream, its proprietary waste collection system. Despite the change in government following Malaysia’s general elections (GE14), AWC remains confident its order book will not be affected as the bulk of its contracts were won through open tenders and not direct negotiations.

Given the in-line results, no changes to our earnings estimates and “add” call. However, our TP is lowered to RM1.00, now based on 11.2 times CY19F PER, 20% discount to the construction sector’s 14 times (versus sum-of-parts previously) as we take a more conservative stance by excluding its net cash of RM43.6 million.

This is due to risks from potential reviews of mega projects by government leading to slower contract awards. We continue to like AWC for its defensive earnings and undemanding valuations at 8.1 times CY19F PER. Downside risks comprise cancellation of its facilities management contracts, and delays in progress billing. — CGSCIMB Research, May 21