Ahmad Zaki Resources Berhad (AZRB) is a Malaysia-based company engaged in investment holding, providing management services and as contractors of civil and structural construction works. AZRB operates in four segments: construction, which is engaged in civil and structural construction works; trading in oil and gas and other related services, which include dealing in marine fuels, lubricants and petroleum-based products; cultivation, which is engaged in oil palm, and other operations, which is engaged in property development, investment holding, provision of management services and dormant companies. During the year ended December 31, 2009, AZRB's projects include Design and Built Complex Kerja Raya 2, Federal Road 3 Pekan to Kuantan, University Darul Iman Building Works, Maternity Hospital Terengganu, Rectification Works at Dataran Putra Precint 1and others. In August 2011, the Company sold 21.57% interest in Eastern Pacific Industrial Corporation Berhad.

FINANCIAL PERFORMANCE AS OF 31st  DEC 2015

For the year ended 2015, AZRB’s profit for the year nearly doubled to RM21.5m from previous year made possible by the substantially improved other operating income AZRB despite incurring RM46.7m interest expenses (more than 2x of previous FY.

In terms of balance sheet, AZRB assets had grew to RM1.7b from RM1.5b primarily from larger trade receivables (current) and additional capex + acquisitions. While its networth stood at RM338.7m

In the last 2 years AZRB had grown its order book substantially and its current order book able to sustain AZRB income for the next 3 – 4 years.

Construction, and O&G segment continued to generate profitability supplemented by property sector, while its plantation operations continued to incur substantial losses.

At current price level at RM 0.725 per share, AZRB is trading at nearly 16x P/E and its NTA stood at RM0.69 per share and more or less reflects AZRB’s current financial position. Base on current earnings level, NTA is expected to grow at 0.62 sen per quarter or 2.48sen per annum.

However it is AZRB future prospect that is more exciting, its profitability is expected to improve by leap and bound beyond FY2017, likely by end of FY2020 its net profit would be in excess of RM100m per annum. It is likely by end of FY2020 40% – 50% of its profits before tax would be from operations that generates recurring income.

Here are the facts that substantiate the above statement.

PROSPECTS

CONSTRUCTION SEGMENT

·         AZRB is extremely connected and is likely to be able to secure construction jobs at regular basis to maintain healthy order book hence construction segment will at least maintain current profitability.

·         Awarded part of MRT SSP line (4.5KM) worth RM1.44b that is expected to start in 2H 2016 and expected to be completed by 2022, estimated that translates to RM221.5m revenue per annum till 2022, expected to increase its construction segment revenue by at least RM110m in FY2016 to excess of RM800m.

PLANTATION SEGMENT

·         (Palm oil) Plantation planting activities started in FY2013 and had planted 5,500 hectare by end of 2014. Planned to plant additional 5,000 hectares in 2015 and 2016. The first 5,500 hectares are expected to produce fruit bunches at 30 months age till 25 – 30 years old. Hence by end of FY2017, plantation segment will turnaround and generate income. It is likely by FY2017 planting activities may taper down reducing operating expenses.

·         1 hectare of oil palm trees estimated to produce around 3 tonne of CPO and 1 tonne of palm kernel. In FY2017 plantation segment is expected to generate around RM25m revenue and double in FY2018. Plantation revenue is expected to continue to grow markedly until 2020 as more oil palm trees matures.

·         AZRB currently has an estimated 16,000 hectare land in West Kalimantan Indonesia, of which an estimated 7,500 had been planted. The oil palm plantation is estimated to worth USD80m which translates to around RM320m or around RM0.65sen per share.

Toll Concession (EKVE)

·         EKVE construction began in FY2015 and expected to be completed in 3 years’ time, by FY2019.

·         Expected 140,000 motorist will travel in EKVE, estimated to generate revenue in excess of RM150m.

PROJECTIONS

·         Several assumptions were made base on the facts above to make the projections

o   Construction Segment –

§  Revenue grow at 5% per annum

§  Additional revenue from MRT (SSP line) worth RM220m per annum

§  Maintain its current net profit margin.

o   O &G Segment - growth at 4% per annum + maintain its current net profit margin.

o   Plantation segment

§  – oil palm trees maturity in stages FY2016/1,500 hectare, FY2017/4,000 hectare, FY2018/6,500 hectare, FY2019/8,500.

§  Revenue calculated using CPO price at RM2,500 P/MT.

§  CPO production cost at RM1,100 per MT.

§  Planting activities continued at 2,500 hectare per annum cost RM35m.

o   Property Segment – Growth at 10% per annum + maintain its current net profit margin.

o   EKVE will start in 2H 2019, expecting at least 140,000 motorist per day averaging RM3 per motorist.

In summary AZRB’s profitability jumping several folds entirely dependent on 

1.      Turnaround in plantation segment with expectation that oil palm trees planted in 2013 and 2014 will mature in FY2016 and FY2017 until 10,000 hectare oil palm trees producing fruit bunches + CPO prices maintain at RM2,500 P/MT.

Maintain reasonable growth rate for all segments especially construction sector.

As a reminder for myself

I am always remind myself If the trend is go again me and violated my SL limit, I will cut loss base on the risk preference.