Gabungan AQRS plans to transform property arm

Gabungan AQRS Bhd (July 16, RM1.34)

Maintain buy with target price (TP) of RM1.86: Gabungan AQRS Bhd has laid out its five-year transformation plan to resuscitate its property division, which is expected to contribute considerable earnings to the group in the coming years. To recall, its construction arm delivers more than 90% of the company’s earnings. The plans for its property arm include relaunching its existing high-rise condominium project, The Peak, as well as a soft launch of its new affordable apartments, E’Island Residence.

It is common market knowledge that The Peak project (current take-up rate 30%) would be relaunched in the third quarter of 2018 (3Q18) upon completion, with embedded greater value for its secured and potential buyers such as built-in cabinets (by Signature Kitchen) and air-conditioning. Gabungan AQRS remains positive about this project largely due to: i) its close proximity to the city centre with good connectivity to major highways (Eastern Dispersal Link Expressway) and interchanges; ii) new high-rise property developments in Johor Bahru have been temporarily put on hold; and iii) Gabungan AQRS will appoint a third-party renowned property agent to market The Peak project for the overseas market. Also, this project is grandfathered from the minimum purchase price requirement of RM1 million for foreigners, which will result in better sales.

The E’Island project has received encouraging response, with almost 400 buyers (comprising a balanced mix of bumiputera and non-bumiputera) having registered their interest before its official launch. The 1,140-unit semi-furnished affordable apartment project ranges between RM350,000 and RM495,00 per unit (80% of the total number of units have an average price range of RM350,000 to RM370,000 per unit), and is expected to be launched in 3Q18. The RM491million project sits on 19 acres (7.69ha) of land, located in Puchong with multiple major highway connectivity.

The development of the RM1.7 billion One Jesselton project is expected to commence in 4Q18. We understand Gabungan AQRS is currently in talks with potential investors to invest in Gabungan AQRS-formed special purpose vehicles to fund its mall, hotel and serviced-suite development.

We expect Gabungan AQRS’ future balance sheet and operating cash flow to strengthen significantly on the back of its five-year transformation plan. Based on our conservative estimates, we project its operating cash flow from The Peak and E’Island projects to contribute at least RM350 million and RM100 million respectively during the five-year time frame.       

The transformation plan for its property division will turn the company into a high cash-generating and high dividend-paying division for financial year 2019 (FY19) to FY23, and there could be potential upside to earnings and dividends should it secure mega construction projects. The company has guided that the retained earnings from The Peak project will be distributed to shareholders in the form of dividends, while retained earnings from E’Island will be used for the company’s working capital

The steady anticipated cash flow from the property division’s transformation plan is sufficient to reward its shareholders with an alluring dividend payment of 10sen/share for FY19 to FY23, with potential upside assuming Gabungan AQRS decides to distribute profit from the construction division to its shareholders.

Gabungan AQRS’ earnings will be affected as its light rail transit line 3 (LRT3) contract value will be reduced by RM100 million due to the cancellation of one out of three stations (Temasya), while the completion date will also be delayed to 2024 (from 2020). We expect earnings to be reduced by 12%, 10% and 2% respectively for FY18 to FY20 following the proposed LRT3 scale-down and deferment. The earnings contribution from the LRT3 project alone will account for around 35% of Gabungan AQRS’ full-year earnings for FY18.

The company remains positive about securing contracts worth RM1.5 billion in 2018, largely from megaprojects such as the East Coast Rail Link, Pan Borneo Highway Sabah and others. To date, Gabungan AQRS’ external outstanding order book stands at RM2.3 billion while new job wins secured stand at RM60 million.

While we acknowledge there will be potential downside in earnings in FY18 forecast (FY18F) to FY20F from the extension of the LRT3 construction period, we believe Gabungan AQRS’ earnings downside could be partially offset/mitigated by: a) securing new job wins, with value higher than our assumption; and b) better-than-expected progress billings recognition (aside from the LRT3 project).

Maintain “buy” with TP of RM1.86, based on 10 times FY19F fully diluted earnings per share of 18.6 sen, as small-mid caps derate to reflect tighter market liquidity. Key catalysts for the stock would be new large construction orders in the second half of 2018. We like Gabungan AQRS for its: 1) superior order-book cover; 2) strong position which will enable it to secure new jobs; and 3) anticipated strong earnings growth. — UOB Kay Hian, July 16

This article first appeared in The Edge Financial Daily, on July 17, 2018.

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