AWC: New Coverage Initiated on Strong Earnings Growth Prospects and Strategic Segment Performance
| Investment Bank | Hong Leong Investment Bank |
|---|---|
| TP (Target Price) | RM1.41 (+36.8%) |
| Last Traded | RM1.03 |
| Recommendation |
Hong Leong Investment Bank (HLIB) has initiated coverage on a key industrial services provider, projecting a robust earnings upcycle driven by strategic growth across its core segments and strategic initiatives. The investment bank has issued a “BUY” rating with a target price of RM1.41. This positive outlook is underpinned by strong order books, strategic contract renewals, and an expanding market presence in high-growth areas.
Financial Performance and Outlook
The research report anticipates a significant surge in core net profit, projecting an increase of 88% for FY25f, 31% for FY26f, and 20% for FY27f, translating to an impressive 3-year Compound Annual Growth Rate (CAGR) of 44.0%. This strong growth trajectory follows a turnaround in FY24, where earnings and margins recovered, particularly driven by its Engineering, Environment, and Rail segments, alongside improved profitability in its Integrated Facility Management (IFM) division through cost optimization and contract renewals.
Key Growth Drivers
The company’s business is anchored by four main pillars: Integrated Facility Management (IFM), Engineering, Environment, and Rail. Each segment is poised for significant contributions to the projected earnings upcycle.
Environment Segment
Identified as a prime growth driver, this segment is expected to benefit from robust demand for modern waste collection solutions. Its strong market position, including an estimated 90% market share in Malaysia, positions it to capitalize on the booming property market and new launches in Singapore, where pneumatic waste conveyance systems are increasingly mandated. Furthermore, strategic expansion into the Middle East, with mega-projects like NEOM, The Line, and Abu Dhabi developments, offers substantial high-value contract opportunities, complemented by new market entry in Indonesia.
Engineering Segment
This segment is anticipated to deliver strong performance, buoyed by a robust order book. Growth is expected from the thriving property markets in both Malaysia and Singapore, coupled with increasing investments in data centers (DC) across Malaysia. DC projects are particularly attractive due to their fast-tracked nature and higher profit margins compared to traditional property-related jobs, positioning the company as a strong contender in the DC space.
Integrated Facility Management (IFM) Segment
While the IFM segment experienced softer earnings performance in recent years due to cost pressures and fixed-pricing mechanisms, a significant turnaround is expected. The impending expiry of the majority of its concession agreements by end-2025 presents a crucial opportunity for contract renegotiation and cost optimization, paving the way for improved profitability. The company is actively targeting new concession-based hospital contracts and opportunities in medical equipment maintenance programs, with revenue projected to increase significantly by FY27f.
Rail Segment
The Rail segment is set for strong performance, with its order book supported by ongoing projects. Significant long-term earnings visibility is provided by upcoming major infrastructure initiatives, including system contracts for Penang LRT Segment 1 (estimated RM300m), and potential large-scale projects like MRT3 (RM45bn) and High-Speed Rail (RM70bn), which are expected to substantially boost its order book and set a higher earnings base for the next 72 months.
Valuation and Recommendation
HLIB Research initiated its coverage with a “BUY” rating and a target price of RM1.41, based on 14x FY25f P/E. This valuation represents a 15% discount to the pure-play property sector’s average P/E, deemed fair given that approximately 70% of the company’s projected profits for FY25f-27f are linked to its Environment segment, which is closely tied to the property market. The investment bank believes the stock is well-positioned to enter a new earnings upcycle, led by its Environment and Engineering segments, with further contributions from IFM and Rail expected from FY27f onwards.
