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This article first appeared in The Edge Financial Daily on January 20, 2020

Gabungan AQRS Bhd
(Jan 17, RM1.18)
Maintain buy with an unchanged target price (TP) of RM1.65:
To recap, the group’s headline third quarter ended Sept 30 of financial year 2019 (3QFY19) profit after tax and minority interest (Patmi) was at RM33.1 million (down 37.1% year-on-year [y-o-y]). The construction division was the key income driver of 3QFY19, with a revenue share of 89.2%. We note the 3QFY19 income was largely contributed by the work progress of the Sungai Besi–Ulu Kelang Elevated Expressway or SUKE highway and Pusat Pentadbiran Sultan Ahmad Shah (PPSAS), Pahang.

The planned One Jesselton Waterfront is expected to be a key driver of the group’s long-term earnings and cash flow. The planned mixed waterfront development is underpinned by its strategic features — a strategic location, an absence of comparable competitors, and a high number of tourists to Kota Kinabalu, Sabah.

It is notable the Kota Kinabalu International Airport serves the second highest number of tourists after the Kuala Lumpur International Airport. Plus, the waterfront is sandwiched between two important marine hubs which are the Kota Kinabalu Ferry Terminal and Terminal Ferry Pasar Besar Kota Kinabalu. Upon its completion, the development is expected to generate a net sale value of more than RM1.8 billion and a potential recurring annual income of RM70 million.

To recap, the group’s earnings shrank 33.6% y-o-y for 3QFY19 due to the lower work progress of the Light Rail Transit Line 3 (LRT3). Moving forward, we anticipate better contributions from the LRT3 due to better work progress for 4QFY19; and more efficient cost management. The work progress of the LRT3 is expected to peak in the second half of FY20 (2HFY20). As of Sept 30, 2019, Gabungan AQRS Bhd’s outstanding construction order book stood at RM1.8 billion, providing an earnings visibility until 2022.

Gabungan AQRS’ luxury residence project, The Peak, in Johor Baru was 30% sold. Apart from that, PRIMA Gambang is expected to be completed in 2HFY20 and PPSAS is expected to be completed later this year. The property segment will continue to contribute to Gabungan AQRS’ earnings despite the stagnant growth in revenue.

We leave our earnings forecasts unchanged as the visit yielded no positive or negative surprises. We maintain our TP at RM1.65 ascribed to 13 times price-earnings ratio of FY20 earnings per share. In view of the prevailing construction sector headwinds, Gabungan AQRS is expected to focus and leverage on their current portfolio in order to generate more income and achieve better margins. — MIDF Research, Jan 17

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