Posted Date: August 1, 2022

MARC Ratings has assigned preliminary ratings of MARC-1IS /AIS to Gabungan AQRS Berhad's (GBG) proposed RM200 million Islamic Commercial Papers (ICP)/Islamic Medium-Term Notes (IMTN) Programme. The ratings outlook is stable.

The ratings reflect GBG's moderate construction order book, its low counterparty risk from the largely government-related construction contracts, and its earnings visibility through 2024. The key moderating factor is the challenging operating environment for construction players amid rising raw materials and labour costs.

GBG was established in 2010 mainly as a construction company following a merger of four entities and was listed on Bursa Malaysia in 2012. A restructuring exercise in 2016 under a new management was undertaken to streamline business operations. We note that over the years, GBG has built a track record in undertaking government-related construction projects. As at end-March 2022, its construction order book of RM1.2 billion comprises contracts for Sungai Besi-Ulu Kelang Elevated Expressway (SUKE), Pusat Pentadbiran Sultan Ahmad Shah (PPSAS), East Coast Rail Link (ECRL), Light Rail Transit 3 (LRT3) and PR1MA Gambang (affordable housing), among others. As its construction projects are largely with the government, counterparty credit risk is deemed low. We understand that the group is currently tendering for new government-related infrastructure projects amounting to between RM800 million and RM1.0 billion.

Over the near term, the PR1MA Gambang and LRT3 projects — which account for about 28% and 22% of GBG's total order book as at end-March 2022 — will be key earnings drivers. We note that the operating profit margin, which stood at 7.2% in 2021, could come under pressure from the rising raw material costs and labour shortages. This concern would be alleviated to some extent by a government measure to allow construction contractors to submit variation of price (VOP) claims for government-related projects affected by these issues. To date, GBG has submitted VOP claims of about RM30 million.

GBG is also involved in property development and has two ongoing residential projects. E' Island Lake Heaven Residence in Puchong, Selangor, with a gross development value (GDV) of RM502 million as at end-March 2022 has recorded a 73% take-up rate. Its second project, The Peak, which has a GDV of RM689 million and a take-up rate of 40% is being relaunched following a facelift exercise. Total combined unbilled sales stood at RM360 million.

Group financial performance in recent years largely reflects the timing of progress billings on its projects. For 2021, GBG achieved a pre-tax profit of RM25.7 million following a pre-tax loss of RM59.5 million in 2020 due to the impact of the pandemic. In 1Q2022, pre-tax profit was RM6.6 million. Total borrowings of RM298 million as at end-March 2022 translated to gross and net debt-to-equity ratios of 0.61x and 0.30x. We note that about 66% of borrowings are mostly short-term and construction-financing related.

Proceeds of up to RM50 million ICP from the initial issuance under the proposed programme will be largely used to refinance its existing loans and the balance for working capital requirements. Over the near term, about RM80 million cash is expected to be free from encumbrances following the completion of construction projects. This would provide some financial flexibility to meet any working capital needs.

Lim Wooi Loon, +603-2717 2943/ wooiloon@marc.com.my
Farhan Darham, +603-2717 2945/ farhan@marc.com.my