This article first appeared in The Edge Financial Daily, on May 10, 2016.

AWC Bhd
(May 9, 66.5 sen)
Initiate coverage with add rating and a target price (TP) of RM1.13: AWC Bhd offers investors an earnings base of stable, recurring cash flows from its concession business and a fast-growing portfolio of environmental businesses: STREAM, an underground waste collection system; Qudotech Sdn Bhd (QDT), a plumbing engineering company; and DD Technique Sdn Bhd (DDT), a rainwater-harvesting system business.

AWC maintains federal government buildings in the southern region and Sarawak. Its concession was recently renewed for 10 years at RM52 million per annum (pa) for the first five years (a 13% increase), stepping up thereafter. 

AWC was also given a RM145 million critical asset refurbishment programme (CARP) concession at RM14.5 million pa for 10 years. 

In addition, AWC provides similar building maintenance work for commercial/private-sector clients and the healthcare segment. It recently won a RM90 million concession for Shah Alam Hospital.

STREAM has an above 90% market share in Malaysia. QDT has been highly profitable, as it operates in a very small niche market for high-end and high-rise buildings. DDT’s margins have also expanded sharply, as rainwater-harvesting systems are increasingly being made mandatory.

We forecast a three-year earnings per share (EPS) compound annual growth rate (CAGR) of 33% for financial year 2015 (FY15) to FY18, driven by: i) a 13% concession rate increase; ii) the CARP programme and Shah Alam Hospital; and iii) its high-margin environmental businesses.

AWC’s net cash position stood at 24 sen as at end-March 2016, with little to no borrowings. We believe there is a substantial scope for special dividends as the group has already locked in the concession rates for the next 10 years. 

Our forecast dividend yields of 3.2% to 4.8% exclude any potential special dividends. We initiate coverage with an “add” rating and sum-of-parts-based TP of RM1.13, valuing the business at an FY17 forward (FY17F) price-earnings ratio (PER) of 11 times, a 10% small-cap and liquidity discount to its larger peer, UEM Edgenta Bhd. 

The stock is very cheap, trading at an FY17F PER of 8.3 times (ex-cash of only 4.7 times), versus its three-year EPS CAGR of 33%. A potential catalyst is the strong upcoming third quarter of FY16 results. — CIMB Research, May 6