This article first appeared in Corporate, The Edge Malaysia Weekly, on May 23 - 29, 2016.

FOR years, investors hardly looked at AWC Bhd. But that has changed now, thanks to its positive financial results and newsflow. 

Year to date, the integrated facility management (IFM) company’s share price has shot up 88.5%, hitting a historical high of 77 sen last Wednesday before closing at 73.5 sen on Thursday for a market capitalisation of RM188.4 million.

It is as if “the market suddenly realised” AWC’s value, group CEO and managing director Datuk Ahmad Kabeer Mohamed Nagoor tells The Edge.

As an established IFM service provider, AWC has held the concession for maintaining 37 federal government buildings in the southern region of the country since 1998. Its last contract, worth RM46 million a year, expired in 2013, creating uncertainty about its earnings, which put investors off. 

The company also chose not to pay any dividends for two financial years, prudently conserving cash in case its long-standing concession was not renewed.

However, such worries were put to rest when it secured two new concessions this year. One of them is actually an extension of its existing concession but with improved terms for the provision of IFM services. This contract runs from Jan 1 this year to December 2025, earning AWC RM52 million per annum in the first five years and a higher RM59 million per annum for the remaining five years. 

The other contract is a RM145 million critical asset refurbishment programme that involves  a 10-year concession to replace old mechanical and electrical equipment in government buildings.

Ahmad Kabeer says these long-term contracts have given AWC high earnings visibility and put it back in a position to pay dividends again. As at its first half ended Dec 31, 2015 (1H2016), AWC had cash of RM60.96 million or net cash per share of about 24 sen.

At the same time, the company has begun to diversify the earnings base of its facility division. In FY2015, concession work represented 65% of the division’s income, falling from 75% the year before. Today, AWC counts among its clients the Heriot-Watt University Malaysia, Johor’s Educity as well as high-rises like Menara Celcom and Menara Felda.

More importantly, the company is making inroads into the lucrative healthcare sector where maintenance services are provided by a small and tight group of specialised companies. Building on its earlier success in maintaining the Cheras Rehabilitation Hospital and all state clinics in Johor, AWC won a RM90 million contract in March to maintain the 300-bed Shah Alam hospital for five years.

This is the kind of track record that makes AWC competitive when bidding for jobs involving government and private healthcare centres, remarks Ahmad Kabeer.

“This is the first time we managed to penetrate the healthcare market, going against strong players. Now, we would like more play in the sector, which is more challenging and price-sensitive, with reasonable margins in the private and government hospitals … We have the base and now we can take it to the next level on the hospital side.”

In its facility division alone, AWC has an outstanding order book of RM272 million — which is much larger than its current market capitalisation of RM189.64 million — that will keep it busy until FY2018. An existing tender book of RM120 million, meanwhile, indicates more jobs can be expected.

“Imagine all the buildings coming up in Greater Kuala Lumpur, all that is in the pipeline. A lot of buildings are being planted. The whole space is going to change and there is a lot of play coming up for us. It is a challenge for the building maintenance industry to go up the value chain, to have competent and technical expertise and to have a service culture,” Ahmad Kabeer says.

“I think AWC can meet the challenge to move up and keep improving its service level for its clientele.”

Although the facility division has an abundance of contracts and is AWC’s largest revenue contributor, a competitive market means profit margins are suppressed. In FY2015, the division raked in RM73.7 million or 58% of the company’s turnover but only 14% of its net profit — the least among AWC’s three divisions. A back-of-the-envelope calculation indicates that the profit margin of the facility division was 3.65%.

Nevertheless, AWC differentiates itself from its competitors — which provide “plain vanilla maintenance services” — by offering its clients an automated waste collection system through its environment division under the Stream brand as well as plumbing and rainwater harvesting systems. These are among the sustainability initiatives that clients look for today, Ahmad Kabeer points out.

AWC’s environment division — its largest profit generator — is also growing. 

The Stream automated waste collection system is well known and AWC has ongoing projects in Malaysia, Singapore, Hong Kong and Abu Dhabi that fill its outstanding order book of RM105 million.

Ahmad Kabeer says a contract to implement the Stream system at the Cathay Pacific Catering Centre has opened up new opportunities for AWC in Greater China. In fact, the company is looking to establish a team in Hong Kong to offer maintenance services under Stream and to eventually win more jobs. This bodes well for the company as a whole because its environment arm is highly profitable, enjoying pre-tax margins of 20% to 25%.

In Malaysia, Stream is the market leader with a 90% share. However, automated waste collection systems in the country are still underused, thus making it difficult for the industry to grow.

Ahmad Kabber says his “dream” is to see the implementation of Stream in affordable housing developments in Malaysia, similar to what Singapore’s Housing Development Board has mandated in the refurbishment of its developments and in new projects.

AWC is pitching the idea to the Malaysian government, whose Economic Transformation Programme aims to implement an efficient waste collection mechanism. Progress has been slow but Ahmad Kabeer says buy-in from government-linked development companies is promising.

Meanwhile, the benefits of AWC’s acquisition of premium plumbing outfit, Qudotech Sdn Bhd, and rainwater harvesting company, DD Techniche Sdn Bhd (DDT), under its engineering division will soon be seen. 

The two companies not only came with a profit guarantee of RM3.9 million per annum in FY2016 and FY2017 but are also able to secure high-value contracts. The latest example is Qudotech’s plumbing contracts for KL118 and the Malaysia Airlines Bhd building worth RM62 million and RM19 million respectively.

At the same time, DDT’s prospects are brighter with state regulations that make rainwater harvesting systems mandatory.

On May 6, CIMB Research initiated coverage of AWC with an “add” call. Trading at a forward price-earnings ratio of 11.67 times, the company’s valuation seems compelling. But CIMB Research’s sum-of-the-parts target price of RM1.13 suggests that the stock still has plenty of upside for investors who have been late to discover AWC.

The company will announce its 3QFY2016 results before the month is over and many expect it to have improved on its 2QFY2016 numbers with pre-tax profit tripling to RM7.1 million quarter on quarter. Maybe it is time the company got a serious second look.

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