Gabungan AQRS’ selldown a buying opportunity

This article first appeared in The Edge Malaysia Weekly, on July 10, 2017 - July 16, 2017.
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FUELLED by a ballooning order book and growing institutional interest, Gabungan AQRS Bhd has enjoyed a stellar rally this year, rising 63% to a high of RM1.47 on June 9. But the stock seems to be pausing for a breather.

Over the past month, the construction and property company has seen its share price ease 7% to close at RM1.37 last Thursday. It would appear that the corporate exercises announced on June 30 did not go down well with the market.

The group is proposing to place out up to 10% of its enlarged issued shares. Half of the placement will be used to satisfy the acquisition of Monolight IBS Building System Sdn Bhd — a company that comes with RM35 million in profit from a PR1MA project in Kuantan. The profit is expected to be realised over the next three years.

Given that the shares placed out to acquire Monolight have been fixed at RM1.33 apiece, it values the acquisition at only RM26.02 million. This makes it value accretive for shareholders.

Keep in mind that Gabungan AQRS is not unfamiliar with Monolight’s shareholders. This includes Nirvana Asia Group founder Tan Sri Kong Hon Kong, who has a 71.23% stake in the latter.

Gabungan AQRS’s wholly-owned subsidiary, Gabungan Strategik Sdn Bhd, is currently in a 49:51 joint venture with Monolight for the said PR1MA project. Monolight is the project owner while Gabungan AQRS is undertaking the construction. Gabungan AQRS is expected to make about RM35 million in profit from the RM424.23 million project for 2,186 houses and 36 retail units in Kuantan.

It is worth noting that Kuantan is familiar territory for Gabungan AQRS’ substantial shareholder and CEO Datuk Azizan Jaafar, who took over the reins one year ago. He is well known in Pahang for developing the Kota SAS township, which includes the new RM415 million state administrative centre — the brainchild of Sultan Ahmad Shah of Pahang, after whom it has been named.

Not surprisingly, Gabungan AQRS bagged the RM360.98 million contract for the construction of the administrative centre earlier this year. The project has inflated the group’s order book to a whopping RM1.7 billion.

More importantly, this figure does not include any nominated sub-contractors (NSC). NSCs are selected by the client and come with very low margins, since the work is basically outsourced. In fact, analysts typically apply a substantial discount to a construction company’s order book — between 20% and 35% for NSC work.

This is one reason that fund managers have been particularly enamoured with Gabungan AQRS of late.

It is understood that there has been strong interest for the other 5%, or 19.56 million shares, that Gabungan AQRS is hoping to place out.

“The placement’s price has not been fixed yet, but it cannot be lower than RM1.33. Even at that price, some institutions are already offering to take up large portions of the block. They are fighting over it,” says an executive familiar with the exercise.

Currently, institutional funds control about 48% of Gabungan AQRS while Azizan holds a 13.4% stake.

That said, not all investors are thrilled with the placement since it arguably dilutes the group’s earnings per share for other shareholders.

The rationale for the placement is to fund the group’s working capital. As at Dec 31, 2016, Gabungan AQRS’ net gearing stood at 0.78 times: RM38.37 million in cash against RM302.396 million in debts. Post corporate exercises, the group’s net gearing is expected to reduce to 0.68 times.

In contrast to the RM1.7 billion order book, it has a relatively small balance sheet.

Thus, Gabungan AQRS is also on an asset monetisation path. It is understood that the group is currently in the process of disposing of its stake in the Jesselton Waterfront project in Sabah, worth RM1.5 billion. The project is a joint venture with Suria Capital Holdings Bhd. This value is not included in the RM1.7 billion order book.

Details on the disposal have not been revealed, but Gabungan AQRS is expected to retain some equity or land in the project that would contribute recurring income. A source familiar with the deal tells The Edge that the group is already in talks with a Singaporean buyer and if all goes well, the disposal could be completed before the end of the year.

This would be a big boost for the group’s bottom line, which has already shown strong promise this year.

In the first quarter ended March 31, 2017, the group’s revenue almost doubled year on year to RM158.9 million while net profit almost quadrupled to RM16.14 million, mainly due to asset disposals.

In contrast, Gabungan AQRS’ net profit in the financial year ended Dec 31, 2016, was only RM22.8 million on revenue of RM330.05 million.

The Monolight acquisition is expected to add RM8.5 million in net profit to the group’s bottom line this year. Even with the 10% dilution, that works out to 1.98 sen per share. Last year’s full-year earnings per share was only 5.78 sen.

To top it off, the market is abuzz with three other major projects that Gabungan AQRS stands to bag. The first is to tap the Pan Borneo Highway for its precast manufacturing business, which it co-owns with Sabah Economic Development Corp.

In Kuala Lumpur, Gabungan AQRS has been shortlisted as a bidder for one of four civil works packages for the third light rail transit line. This package is expected to be quite sizable — more than RM500 million.

Another potential project for the group in the RM55 billion East Coast Rail Link (ECRL). The ECRL’s alignment places one station in Kota SAS.

“The group believes it stands a good chance of securing the job, given that it is already familiar with the soil and site conditions of the area. It already has resources deployed in the area, which are currently being used to construct the new state assembly hall in Kota SAS,” notes UOB KayHian in an unrated report last month.

The executive familiar with the project also points out that with China’s state-owned China Construction Co Ltd spearheading the project as the main engineering, procurement and construction contractor, there is a likelihood that civil engineering packages will be awarded without an open tender.

This project alone has the potential to add another RM1 billion to Gabungan AQRS’ order book.

Should Gabungan AQRS be fortunate to bag all three major projects, it would certainly need a stronger balance sheet. This may see the group undertake a sizable rights issue in the future.

On a positive note, the group guides that any new fundraising will be used strictly to fund new projects and not to pay off debts.

Against this backdrop, the recent selldown of shares in Gabungan AQRS could present a buying opportunity for investors. At RM1.37 a share, the stock is being valued at only 14 times forward earnings, taking into account profit contributions from the Monolight deal.