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 Repost from The Edge Financial Daily.

(Aug 10, 78 sen)
Maintain buy with a higher target price of RM1.04 from 78 sen: We remain bullish after our meeting with management. The change in government will not impede facility management business sentiments. Instead, AWC is poised to benefit from cost-tightening measures.

As of end-March 2018, AWC’s order book stood at RM1.06 billion in financial year ended June 30, 2018 (FY18), comprising RM774 million for facilities managmenet (FM), RM154 million for engineering work and RM132 million for enviroment services.

The company is currently tendering for RM1.7 billion worth of work across its three divisions. In FY18, the company secured RM150 million to RM200 million of new contracts, meeting our expectations and any additional job win is a bonus. The current order book is sufficient to provide earnings visibility beyond 2020.

The Malaysian government’s ongoing fiscal consolidation initiated after the collapse of crude oil prices and the introduction of the goods and services tax (GST) in 2015 did not prevent the renewal of concessions for the Southern and Sarawak zones in 2016. The outsourcing of FM is deemed necessary for resource saving and is in line with the current government’s cost-saving objectives.

The company expects to consolidate earnings at the end of September or early October 2018. The acquisition allows AWC to venture into rail asset management projects and we envisage earnings will expand by at least 22% from Trackwork’s profit guarantee of RM20 million in FY18 to FY19. We are optimistic about the acquisition and our current forecast excludes earnings contribution from the acquisition.

To recap, AWC proposed acquiring 60% stake in Trackwork for RM43.5 million, through a combination of cash of RM20m and for the balance sum, the issuance of new AWC shares of 11.5 million shares at RM1.00 upon completion (Tranche 2) and RM12 million shares based on five-day volume-weighted average price pursuant to fulfilment of profit guarantee. On June 5, the acquisition was impeded when Trackwork and its international principal Gemac Engineering were served with a demand letter by Fajarbaru for RM19 million with regard to defective tamping machines supplied. AWC postponed the acquisition by three months to assess the implications of the claim.

On July 16th, 2018, it was announced that Gemac Engineering will be solely responsible for the claims, with the agreed amount set at RM14.1 million. Trackwork will not be held responsible from all liabilities and obligations in regard to defective tamping machines.

The company highlighted that the acquisition of Trackwork is expected to be completed by the end of September or early October 2018.

The acquisition is tagged with profit guarantee of RM20 million in FY18 to FY19 and we envisage earnings to expand by at least 22% in our FY19 forecast from Trackwork’s current order book of RM120 million.

Our forecast excludes earnings contribution from the pending acquisition. The acquisition will allow Trackwork to participate (access to financial instruments being previously unavailable) in more open tenders for new rail works and rehabilitation works of existing rail system. We reckon rail tracks and train are in a dire need for maintenance given that KTM trains have derailed twice within a year.

AWC highlighted the synergy with the Trackwork acquisition, in that it allows AWC to venture into rail asset management projects such as track and rail station maintenance in Malaysia (including KTM, LRT and MRT after the two years’ defects liability period).

Overall, we are optimistic about the Trackwork acquisition, given AWC’s successful tapping of synergy with Qudotech previously as the company successfully clinched prominent projects (plumbing work for Menara PNB 119/KL 118 Tower).

AWC is trading at a trailing price-earnings ratio (PER) valuation (8.1x), relatively lower versus its local peers UEM Edgenta Bhd (14x) and GFM Services Bhd.

GFM is the only company trading at a similar PER against the international established players such as Aramak, ISS A/S, Compass Group and Sodexo. We reckon the company is deeply underappreciated largely due to bearish market sentiments and the lack of new high profile contract wins lately.

AWC’s valuation may improve when (i) earnings from delayed projects (environment and engineering) kick in during 2HFY18 and in FY19, (ii) renewed catalysts from the Trackwork acquisition.

As a side-note, institutional shareholdings have risen 3.3% since 2QCY2018 according to Bloomberg, reinforcing our view that the stock is trading below its fair value. — Inter-Pacific Research, Aug 10

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