• Through its wholly-owned subsidiaries, Azam Jaya Berhad (AZAMJAYA) is principally involved in the provision of construction services where it is mainly involved in the construction of road infrastructure in the State of Sabah.  
• We project 3-year earnings CAGR of 25.1%, with core PAT expected to reach RM29.2-50.9m over the next three years, largely supported by the strong orderbook of RM1.45bn, translating to a cover ratio of 5.2x, which will provide earnings visibility over the next 3-5 years, coupled with the robust construction scene in Sabah region and rising allocation to Sabah in the recent Budget 2025.  
• We assign a fair value of RM1.47 per share, representing an upside of 88.5% against to the IPO price of RM0.78. This valuation is based on a P/E ratio of 18x, applied to the FY25f EPS of 8.14 sen. Although the ascribed P/E is below the Construction & Engineering sector's peer average forward P/E of 19.2x and average historical P/E of 24.0x, we believe it is justified given AZAMJAYA's smaller market capitalisation of RM390.0m.

Investment Highlights

Strong track record and reputation. With nearly 30 years in the industry, AZAMJAYA has built a strong track record, commanding approximately 6.0% of the construction market in Sabah. The group has completed several large-scale road infrastructure projects, including: (i) constructing 3 flyovers at the Kolam, Wawasan, and Karamunsing interchanges, as well as upgrading the roads at Jalan Nenas in Karamunsing, (ii) building the longest pre-stressed vehicular bridge connecting Binsuluk and Kuala Penyu across Sungai Sitompok, and (iii) developing the first dual carriageway tunnel connecting Kota Kinabalu Industrial Park with the Sepanggar Bay Container Port.

Well positioned to secure future infrastructure projects. AZAMJAYA is wellpositioned to secure packages from the Sabah-Sarawak Link Road (SSLR) project and Phases 2 and 3 of the Pan Borneo Highway. This is supported by the group's: (i) experience in infrastructure construction and expertise in technically complex projects and (ii) strong working capital from IPO proceeds, which enables it to take on largerscale projects. We anticipate that AZAMJAYA’s order book will start to grow from FY25 onwards, contributing significantly to its earnings in FY26 and beyond.

Higher budget allocation for East Malaysia. Under Budget 2025, development for Sabah and Sarawak continues to be a priority, with allocations of RM6.7bn and RM5.9bn respectively. This increased focus on infrastructure development to support economic growth in East Malaysia bodes well for construction companies like AZAMJAYA, as demand for construction services is expected to rise. Given its experience in large-scale infrastructure projects, AZAMJAYA is well-positioned to capitalize on this growth in the construction sector.

Orderbook cover ratio of 5.2x to provide earnings visibility. As of the latest practicable date (LPD), AZAMJAYA has 9 ongoing infrastructure projects with contract values totalling RM2.8bn, and the unbilled order book stood at RM1.45bn, translating to a orderbook cover ratio of 5.2x based on FY2023 revenue of RM280.8m. We expect net margins to range around 9-10%.

Company Background

Through its wholly-owned subsidiaries, AZAMJAYA primarily provides construction services, with a focus on road infrastructure in Sabah. Additionally, the group has undertaken the one-off development of an industrial park, "The Factory @ Inanam," in Inanam, Sabah.

Business Overview

Provision of construction services (97.9% of FY23 revenue). AZAMJAYA is a leading provider of road infrastructure construction services in Sabah, where it has participated in numerous projects, including roads, highways, bridges, flyovers, and tunnels, over the past 30 years. Its clients include agencies under both the Federal and Sabah state governments (such as the Ministry of Works, Malaysia, and JKR Sabah), as well as property developers and other main contractors.

i) Build-only projects. In build-only projects, AZAMJAYA is responsible forexecuting the construction work based on the design and technicalspecifications provided by the client. This includes project planning,management, and overseeing all stages of the construction. The grouphandles subcontractor appointments, procurement of construction materials,and ensures proper monitoring and management to complete the projects ontime. AZAMJAYA also directly undertakes certain portions of the work with itsown fleet of construction machinery and equipment, along with its team ofinternal construction workers.

ii) Design and build projects. For design and build projects, AZAMJAYAmanages the entire process, from project design to completion. Its in-house architects, quantity surveyors, and engineers collaborate with external professionals, including land and quantity surveyors, geotechnical consultants, and engineers, to develop project designs that meet the requirements of the project owner. This is in addition to the management responsibilities typically involved in build-only projects.

Property development (2.1% of FY23 revenue). In 2015, the group ventured into industrial property development via the development of an industrial park known as “The Factory @ Inanam” on a parcel of approximately 9 acres industrial land in Inanam, Sabah. The development of “The Factory @ Inanam” was carried out by AJ Land and was the Group’s sole industrial property development project.

Financials

Revenue highlights.The group reported revenue of RM280.8m in FY23, a decrease of 5.4% YoY, mainly due to (i) a claim submitted by Pembinaan AJ in 2018 amounting to RM1.5m in relation to the project awarded by JKR Sabah, (ii) less construction work on the Jalan Lintas Upgrading Project as it was nearing completion, and (iii) reduced construction work on the Pan Borneo (WP06) project due to design changes and the relocation of utility works.

Earnings forecasts. Moving forward, we project a 3-year earnings CAGR of 25.1%, with core PAT expected to reach RM29.2m, RM40.7m, and RM50.9m over the next three years, largely supported by (i) the strong orderbook of RM1.45bn, translating to a orderbook cover ratio of 5.2x, which should provide earnings visibility over the next 3-5 years, coupled with (ii) robust construction activities in the Sabah region and (iii) higher budget allocation to Sabah in the recent Budget 2025.

Valuations

We assign a fair value of RM1.47 per share, representing an 88.5% upside against the IPO price of RM0.78. This valuation is based on a P/E ratio of 18x, applied to the FY25f EPS of 8.14 sen. Although the ascribed P/E is below the Construction & Engineering sector's peer average forward P/E of 19.2x and average historical P/E of 24.0x, we believe it is justified given AZAMJAYA's smaller market capitalisation of RM390.0m.

Investment risks

Highly dependent on government expenditure. The termination of any of its ongoing construction projects by the Ministry of Works, Malaysia or JKR Sabah would result in a decrease in its order book which will in turn have a material adverse impact on its business and financial performance.

Reliance on subcontractors. Any failure of its subcontractors to complete such subcontracted works to the required standards or at all, may result in the group’s bearing some or all the costs of the claims from its clients, which may in turn have a material adverse impact on the business operations and financial performance.

Increase in construction materials, subcontractors and labour costs. Any increase in costs that the group is unable to pass on to its clients could result in project cost overruns, potentially exerting a negative impact on its profit margins and financial performance.

Experience a delay in / non completion of projects. Any unapproved extension in the amount of time it takes for the group’s to fulfil its contracted obligations may subject it to LAD claims from its clients, which may have a material adverse effect on our reputation and financial performance.

Source: Mplus Research - 22 Oct 2024