MRT works to pull the construction wagon. Ahmad Zaki's (AZRB) outstanding construction orderbook stood at RM1.88bn as of Mar 2012, with RM765m worth of new job secured this year, solely from the v6 viaduct package of the Klang Valley My Rapid Transit (KV MRT) Sungai Buloh-Kajang (SBK) line. Moving into 2H this year, we expect the division to pick up momentum as physical works on the KV MRT progress further. Management said the group is actively pursuing more tenders in 2H12. Some of the jobs it is eyeing are the RM200m worth of station packages on the SBK line, foundation works for Kuala Lumpur International Financial District (KLIFD) worth more than RM1bn, as well as jobs relating to the potential redevelopment of some old buildings along Jln Sultan Ismail. Our checks with sources indicate that the group may be keen on the proposed refurbishment of the former MAS headquarters along Jln Sultan Ismail, which PNB bought over in 2006. We understand that the project, worth over RM600m in total, could also involve the construction of a new building next to the existing tower to make way for a 6-star hotel. We are forecasting for an orderbook replenishment of RM500m p.a. for both FY13 and FY14, with our FY12 target unchanged at RM1bn.

More news from KLORR. In 2007, AZRB received the Letter of Intent for the development of the proposed RM1.7bn East Klang Valley Expressway on a build-operate-and-transfer (BOT) basis. However, the proposed project hit a snag following the change in Selangor's state government in the 2008 General Election. The 40km expressway, which has since been renamed Kuala Lumpur Outer Ring Road (KLORR), is an orbital ring road in the greater Kuala Lumpur area that will serve as an alternative to the presently congested Middle Ring Road 2 (MRR2). We expect more developments relating to this project in 2H12, most likely after the next general election, as management has pointed out that the concession agreement would be finalized over the next few weeks, followed by financial closure. Should the project get the green light from the relevant authorities, this could be a major re-rating catalyst for AZRB, especially if the terms of the concession worked out in the company's favor in the long run.

Bunkering unit to stabilize. In FY11, AZRB's bunkering division contributed some 40% of the group's bottomline. Largely dependent on the level of activities in the local O&G industry, this division is principally engaged in the supply of marine fuels and lubricants at Kemaman Port for use at the offshore platforms for O&G drilling operations and as fuel for supply vessels. Going forward, we expect the contribution from this division to remain fairly stable at 5% growth p.a. as we believe the local O&G industry is still resilient, driven mainly by Petronas' exploration activities. We expect Petronas to boost its domestic production this year given that there is ongoing disruption at its Sudan operation. Also, we gather that Petronas intends to boost its local capex back to the levels last seen in 2009 of about RM45bn p.a.

Potential in plantation division. Having secured the development rights for plantation land of some 21,000ha in total in West Kalimantan, AZRB is now sitting on a total planted area of 5,000ha with an average age of 3 years. Although the contribution is likely to remain insignificant in the medium term, we understand that management plans to expand its plantation division in the long term and possibly operate its own downstream activities such as procuring a mill. We believe this potential venture will beef up its recurring revenue and help to mitigate the fluctuations experienced in its more cyclical construction and bunkering divisions. As such, we see huge underlying potential in this segment in the long run.

Legal tussle with Al-Faisal still on. On its ongoing legal tussle with Saudi Arabia's Al-Faisal University over the latter's decision to liquidate the performance and advance bonds totaling SAR52.6m, management said the final outcome would be known by early 4Q12. AZRB is confident that the court would rule in the company's favor. The worst-case outcome, which we opine is unlikely to happen, is that AZRB would have to fully write off the amount from its books, which would then result in its FY12 NTA/share dropping from RM0.76 to RM0.60.

TRADING BUY. We continue to like AZRB, from which we expect positive news, especially in relation to KLORR come 2H this year. Hence, we maintain our TRADING BUY call on the stock. After rolling forward our valuation to FY13 based on an unchanged 10x 1-year forward PER, our FV now stands at RM0.90. The stock remains a trading buy for now as we are still cautious on the impact of political risk, judging from the previous delays in the rollout of KLORR due to a change in the local political landscape.

Source: OSK