Thursday 28 Mar 2024
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This article first appeared in The Edge Financial Daily on October 16, 2018

AWC Bhd
(Oct 15, 80.5 sen)
Maintain add with a target price (TP) of RM1.26:
A one-day non-deal roadshow was hosted in Singapore on Oct 5, 2018 for AWC Bhd’s management to meet institutional investors. The company met six fund managers. AWC was represented by its chief financial officer Richard Voon and vice-president Hisham Najmuddeen, who was in charge of special projects and investments.

AWC stated that its financial year ended June 30, 2018 (FY18) net profit had declined 1% year-on-year (y-o-y) as stronger results of its facilities division (FY18 profit before tax [PBT] growth of this segment was over 100% y-o-y) were offset by weak results of the engineering division (of which the FY18 PBT declined by 75.4% y-o-y). The decline in profitability of its engineering business was owing to cost overruns for air-conditioning projects (most of these have since been completed) and unforeseen delays in certain projects.

AWC reiterated that it remains upbeat about its Trackwork & Supplies (TWS) prospects. To recap, AWC recently received shareholders’ approval to acquire a 60% stake in TWS for RM43.5 million. Despite cancellation and/or deferment of major rail projects in Malaysia, AWC was confident that TWS is well positioned to benefit from rail projects that have not been cancelled. We gathered from AWC that TWS had an outstanding order book of RM70 million and a tender book of RM900 million, which excludes any contribution from cancelled projects.

We are confident that AWC will deliver stronger results for FY19. While most of its engineering projects that faced cost overruns have been completed, we believe the group will also benefit from full-year contributions from new projects secured by the facilities management segment in FY18. AWC will also start consolidating TWS’ earnings in the second quarter of FY19 (2QFY19). Note that TWS has given AWC a profit guarantee to deliver a profit after tax of at least RM8 million for the financial year ended Sept 30, 2018 (FY18) and RM12 million for FY19.

Our TP of RM1.26 is based on 11.2 times calendar year 2019 forecast (CY19F) price-earnings ratio (PER) and at a 10% discount to its biggest market capitalisation peer UEM Edgenta Bhd’s current CY19F PER. We find AWC attractive as it is trading at 8.7 times CY19F PER and at a 15% discount to its historical five-year mean of 10.1 times, plus a healthy balance sheet (its net cash position was RM44.4 million as at 4QFY18) and strong earnings prospects. Key downside risks include contract execution delays and/or cost overruns for sizeable projects. — CGSCIMB Research, Oct 12

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