MARC has assigned ratings of MARC-1_IS /A_IS on Gabungan AQRS Berhad’s (GBG) RM200 million Islamic Commercial Papers (ICP)/Islamic Medium-Term Notes (IMTN) Programme. The ratings outlook is stable. 

The ratings incorporate 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 factors are replenishing its construction order book on a timely basis, and managing the impact of rising cost of raw materials and labour on its margins. 

GBG was established in 2010 mainly as a construction company following a merger of four entities and was listed on Bursa Malaysia in 2012. The group had been facing a challenging period up until 2016 when its current Group Chief Executive Officer Dato’ Sri Azizan Jaafar spearheaded a restructuring exercise to turn the group around. Among measures undertaken were to streamline business operations and optimise its cost structure. We note that over the years, GBG has built a track record in undertaking government-related construction projects. As at end-June 2022, GBG’s construction order book stood at RM1.1 billion comprising key 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. As its construction projects are largely with the government, counterparty credit risk is deemed low.

Over the near term, the PR1MA Gambang and LRT3 projects — which accounted for about 28% and 22% of GBG’s total order book as at end-June 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 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-June 2022. Take-up rates stood at 77% (E’Island) and 40% (The Peak); the slower take-up rate for The Peak is due to the fact that sales for the Bumiputra component have been weak, leading to the group halting sales pending conversion to non-Bumiputra 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. With unbilled sales of RM364 million mostly from the E’Island project, GBG’s property division provides earnings visibility through 1H2024. Property inventory level remains modest at RM19 million as at end-June 2022.

GBG’s fluctuating financial performance in recent years largely reflects the timing of progress billings on its projects. For 1H2022, GBG achieved y-o-y higher pre-tax profit of RM13.1 million (1H2021: RM9.6 million). Going forward, in addition to the current order book, the group’s profitability will be supported by new government-related infrastructure projects, amounting to between RM800 million and RM1.0 billion that the group is currently tendering. Total borrowings stood at RM277.1 million as at end-June 2022, translating to gross and net debt-to-equity (DE) ratios of 0.56x and 0.28x. We note that about 66% of borrowings are mostly short-term and construction-financing related. About RM140 million is projected to be repaid by end-2022 upon completion of key construction projects. 

Proceeds of RM48 million ICP from the initial issuance under the programme is largely used to refinance its existing loans and the balance for its working capital requirement. The group has cash balance of RM153 million. Over the near term, about RM80 million 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.

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.