Rating action                   

MARC Ratings has affirmed its ratings of MARC-1_IS /A_IS on Gabungan AQRS Berhad’s (GBG) RM200.0 million Islamic Commercial Papers (ICP)/Islamic Medium-Term Notes (IMTN) Programme. The ratings outlook is stable. As of end-April 2023, GBG had an outstanding of only RM35.0 million ICP.

The long-term rating mainly reflects GBG’s moderate construction order book and low counterparty risk given government-related construction contracts comprise the majority of its order book. This notwithstanding, slow receipt of contract receivables and timely replenishment of its construction order book are key moderating factors. 

As at end-April 2023, GBG’s construction order book stood at around RM1.0 billion which includes 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 Gambang Residensi. The group was awarded a RM99 million contract for government-related projects for the upgrading of sewerage pipes in Klang and construction of a school in Bandar Enstek, Negeri Sembilan in 1Q2023. We continue to view counterparty credit risk as low given construction projects are largely linked to government and government-related entities. The group’s Gambang Residensi and LRT3 projects — which accounted for about 35% and 12% of GBG’s total order book as at end-2022 — will continue to be key earning contributors. 

We note GBG’s property development remains confined to two ongoing residential projects, namely E’Island Lake Haven Residence in Puchong, Selangor, and The Peak in Johor Bahru city, with gross development values (GDV) of RM502 million and RM689 million. As at end-April 2023, E’Island had a high take-up rate of 90% compared to The Peak’s 40%. The latter’s low take-up rate is attributed to poor sales of Bumiputera units which led to the group deciding to halt sales pending conversion of these units to non-Bumiputera status. This notwithstanding, MARC Ratings notes with some comfort that there is no holding cost on this project as all the construction financing has been paid off. Property inventory level remains modest at RM19.0 million as at end-April 2023.

For 1Q2023, revenue grew by 18.8% y-o-y to RM85.2 million. However, pre-tax profit declined by 24.2% y-o-y to RM5.0 million due to higher construction costs and financing. We note the group was able to receive some of the variation of prices (VOP) claims from the government for its earlier construction projects. Going forward, the group’s profitability will be supported by the current order book of over RM1.0 billion as well as unbilled sales of RM353.9 million, mostly from the E’Island project.

Total borrowings stood at RM303.1 million as at end-2022, translating to gross and net debt-to-equity (DE) ratios of 0.60x and 0.30x. About RM115.0 million of its borrowings is projected to be fully paid by 1H2024 through revenue generation upon completion of key construction projects which would lower its DE ratio to 0.35x by end-2024. Its liquidity position continued to be hampered by pledging substantial cash for its banking facilities as securities. Over the near term, about RM65.0 million is expected to be released from encumbrances following the completion of construction projects which would provide some financial flexibility to meet any working capital needs.

The stable outlook reflects our expectation that GBG will maintain its credit profile broadly in line with the rating band.

No long-term rating upgrade is envisaged in the near term. Any upgrade would be led by a sustained and substantial improvement in group profitability as well as liquidity and cash flow metrics.

The rating could come under pressure if group financial performance were to deteriorate substantially and/or if liquidity does not improve from expectations.