Gabungan AQRS in strong position to win new contracts

Gabungan AQRS Bhd (Aug 4, RM1.10)

Maintain buy with a higher target price (TP) of RM1.38: We believe solid subcontractor Gabungan AQRS Bhd is in a strong position to win new contracts due to its strong working relationships with Tanah Makmur Bhd and bumiputera contractor Syarikat Muhibbah Perniagaan & Pembinaan (SMPP). We raise our financial year 2017 (FY17) to FY18 earnings forecasts by 15% to 17% on increased new contract assumptions.

We reiterate our “buy” call, with a higher TP of RM1.38, based on a 10% discount to revised net asset value (RNAV). Gabungan AQRS is the subcontractor for SMPP for the Klang Valley Mass Rapid Transit (MRT) Package V1 project. We understand that SMPP is bidding for work packages for the MRT2 and Sungai Besi-Ulu Kelang Elevated Expressway (SUKE) projects currently. We believe Gabungan AQRS will secure subcontract works if SMPP wins some of these projects.

Construction partner Tanah Makmur is the developer of the 1,500-acre (607.03ha) township called Kota SAS, Bandar Baru Kuantan, with a total gross development value of RM4 billion. Gabungan AQRS is negotiating to build the Kota SAS government administration centre, and its share of work is estimated at RM300 million to RM320 million. In addition, there are opportunities for Gabungan AQRS to be involved in the future development of the 228-acre commercial and government precinct of the township.

Assuming that the SUKE package is worth RM900 million to RM1 billion and Gabungan AQRS secures a 50% share of work as a subcontractor, we believe this would lift its order book by RM400 million to RM500 million. As a subcontractor, its profit before tax (PBT) margin is generally low at about 6%.

Given the solid prospects for Gabungan AQRS to participate in the future development of Kota SAS, we assume that it will secure about RM800 million worth of new contracts in 2017, at a conservative PBT margin of 6%. We lift our earnings forecasts by 17% for FY16 and 15% for FY17.

We increase our RNAV per share estimate to RM1.54 from RM1.33, assuming higher sustainable earnings of RM30 million instead of RM22 million for its construction division (we maintain our price-earnings ratio valuation of 14 times). Applying the same 10% discount to RNAV, we raise our 12-month TP to RM1.38 from RM1.20. We maintain “buy”. — Aug 4, Affin Hwang Capital

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This article first appeared in The Edge Financial Daily, on Aug 5, 2016. Subscribe to The Edge Financial Daily here.