Gabungan AQRS reaches two landmark milestones

Gabungan AQRS Bhd (July 3, RM1.37)

Maintain buy with a higher target price (TP) of RM1.62: Firstly, a group of private investors, led by Tan Sri David Kong of Nirvana Group, has offered to purchase 100% of Monolight IBS Building System Sdn Bhd (previously Gabungan AQRS Bhd’s 49% joint venture) in return for 19.56 million shares or 5.01% stake in Gabungan AQRS at RM1.33 per share.

Secondly, Gabungan AQRS has proposed the placement of 30 million new shares to expand its working capital. The exercise is slated to enlarge Gabungan AQRS’s shares from 390 million to 409 million shares or +5%. These are two catalytic landmarks in the company’s transformation plan. The entrance of new shareholders signals interest and confidence in Gabungan AQRS’s potential upside.

The shares of Monolight was atypically exchanged with Gabungan AQRS’s proposed new shares instead of a RM26 million consideration in cash by the new shareholders. The placement intends to increase its financial agility to undertake larger projects and usher in strategic cornerstone investors. We view the news as going hand-in-hand with Gabungan AQRS’s growth narrative.

In our previous report (April 27), we cited that the management set three agendas to grow revenue and earnings: Solidify working capital, growing earnings before interest, taxes, depreciation and amortisation (Ebitda) and sustaining margins.

Now, the management has attained the milestone of strengthening its working capital. We suspect Gabungan AQRS is preparing to bid for packages under the East Coast Rail Link, the Pan-Borneo Highway in Sabah, and mobilising the project team for the Kota Kinabalu Waterfront and reducing its financial expenses. The placement intends to raise between RM390.3 million to RM550.3 million.

The new shareholders’ unique entrance is positive towards Gabungan AQRS’s bottom line. Consequently, it is inevitable for us to upgrade our earnings as Monolight’s projects under the 1Malaysia People’s Housing package amounted to RM424.23 million and will be recognised fully on the back of a 12% profit margin for the duration of 36 months.

Hence, we add RM8.8 million or +23.03% to our earnings and RM72.1 million or +16.3% revenue estimates for financial year ending Dec 31, 2017 (FY17E), FY18E and FY19E. Apart from that, we changed our risk assessment, expressed in our discounted cash flow (DCF) valuation as 45% certainty equivalent in the expected cash flow projection.

We adjust our TP to RM1.62 implying +15.7% upside per share based on DCF valuation and changes to our earnings’ forecast and terminal value. — MIDF Research, July 3

This article first appeared in The Edge Financial Daily, on July 4, 2017.

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