THERE was a time when Gabungan AQRS Bhd was considered the next star of the Malaysian construction industry. It was on the radar of investors and its share price more than doubled in just a year to RM1.95 on Jan 8, 2018, from 89 sen on Dec 30, 2016.
The stock, however, has since lost its lustre. Between Jan 5 and Dec 28, 2018, AQRS lost two-thirds of its market value and plunged 65.3 sen. It even underperformed the wider Bursa Malaysia Construction Index, which shed 51.3% over the same period.
After recovering to RM1.50 towards the end of April 2019, AQRS tumbled again to 60 sen about 11 months later.
As at July 22, it was trading at 84.5 sen — a far cry from its early 2018 peak even though its fundamentals appear to be still intact. Its order book of more than RM1.8 billion will last the group until 2023.
So why is the market under-appreciating AQRS?
An analyst The Edge spoke to says AQRS has been overlooked — as have many others — in the Covid-19 pandemic rally.
Although the counter has benefited from the stock market rally, its advance has lagged the prime beneficiaries — glove, healthcare and technology companies.
“Right now, the market is just focusing on the pandemic play. Plus, there isn’t much catalyst for the construction sector right now. The industry itself is in survival mode and only those with a lot of cash to burn can survive,” says the analyst who covers the stock.
Cash is indeed king, especially in an economic downturn. As construction projects ground to a halt during the Movement Control Order (MCO) period and the government’s focus is on containing the pandemic, construction contracts are hard to come by.
For AQRS, its cash and short-term borrowings could be a point of contention. As at March 31, 2020, the group’s cash and bank balances stood at RM126.85 million, while short-term borrowings amounted to RM255.9 million.
Diving deeper into its financial results for the quarter ended March 31, 2020 (1QFY2020), AQRS reported that the majority of its short-term borrowings was in the form of bank overdrafts totalling RM231.9 million.
Analysts covering the stock, however, are not overly concerned about the overdraft situation. This is because the credit facilities are part of AQRS’ agreements with its banks, and the overdrafts are tied to its construction contracts, which are mostly government projects such as the Light Rail Transit 3 (LRT3), Pusat Pentadbiran Sultan Ahmad Shah (PPSAS) and the KotaSAS township in Pahang.
In fact, AQRS is among a handful of contractors that are not affected by uncertainties surrounding the LRT3 project extension to 2024. This is because the group has managed to prevent its RM1.14 billion contract from being downsized, although completion and delivery will still be extended, according to analysts covering the counter.
Looking at AQRS, the group’s financial performance has come under some stress. In 1QFY2020, its net profit plunged 63% year on year to RM4.1 million, while revenue declined 11% to RM76.9 million.
The drop in revenue was due to the plunge in its property development segment. In 1QFY2020, revenue from that segment was just RM739,000 compared with RM13.4 million in the corresponding quarter in 2019.
In the notes accompanying its 1QFY2020 financial results, AQRS explains that the decrease in revenue and profit before tax (PBT) at its property development business was due to lower work progress on The Peak project, compared with the preceding year’s corresponding quarter.
The revenue and PBT from the preceding year’s corresponding quarter were also restated to higher levels due to the reversal of over-provision of liquidated and ascertained damages (LAD) for The Peak project, the group states in the notes.
The Peak is a luxury condominium project in Johor Baru with a gross development value of RM600 million. It is one of only two property projects currently being marketed by AQRS — the other is E’Island Lake Haven in Puchong.
AQRS has been recognising LAD for The Peak since the fourth quarter of 2018, when it recognised RM14.6 million.
The group had last stated the take-up rate for The Peak as 30.1% in its financial results for the quarter ended Sept 30, 2018. The current take-up rate is unknown, although market observers say it has not moved much and is around 40%. The location of the project, which is outside the hot spots along the Johor Straits, could be a reason for the slow sales.
Despite these challenges, most analysts are quite bullish on AQRS’ prospects. Five out of six analysts have a “buy” call on the stock, while one has a “hold”, with an average target price of RM1.17.
In a June 29 report, UOB KayHian’s Farhan Ridzwan maintained his “buy” call after AQRS reported its 1QFY2020 results. Farhan, however, reduced his target price to RM1.16 from RM1.27 previously. He says the results were broadly in line with his expectations at 13% of his full-year forecast earnings of RM27 million.
“We expect AQRS to perform stronger in 2H2020 (from a low base in 1H2020 due to the prolonged MCO), driven by accelerated billings from its construction order book, like the LRT3, and higher billings for its E’Island project.
“Sales should gradually pick up on the back of the Home Ownership Campaign (HOC) 2020,” Farhan writes in the report.
The government’s confirmation that it will continue with mega infrastructure projects such as the Mass Rapid Transit 2 (MRT2), East Coast Rail Link and Pan Borneo Highway should also give impetus to construction companies, including AQRS.
Between March 23 and July 22, AQRS’ share price increased 41% to 84.5 sen.