Background

AZRB is one of the leading Bumiputera contractors in town that has completed RM13.0b worth of jobs to date. Amongst the mega infrastructure jobs, they were involved in MRT1, MRT2, East Coast Expressway, Langat 2 water treatment plant and several other high profile building jobs, i.e. Sepang F1 Circuit and Proton Plant in Proton City.

On top of that, AZRB is also involved in several business segments, i.e. plantation, property, oil & gas, and concessionaires.

Key takeaways

We came away from the conference with three major highlights on construction, plantation and oil & gas division.

Construction. Currently, AZRB’s outstanding construction order-book stands at c.RM3.9b with its construction order-book replenishment at an all-time high of RM1.6b consisting of Tanjung Lumpur Bridge (RM161.m) and MRT package V202 (RM1.4b) back in 2016. While AZRB is comfortably sitting on an outstanding order-book of RM3.9b easily providing earnings visibility for the group over the next 3 years, they are still actively participating in tenders but with a target replenishment of only RM500.0m for FY17 despite a tender book at RM5.0b as management are being more selective on jobs.

Plantation. AZRB also has 8,200ha of planted areas in Indonesia, which have been loss making in the past few years due to the inefficiency in converting their FFB into CPO due to inefficiency and limitation of the existing palm oil mills in West Kalimantan, Indonesia. Going forward, management is targeting to stem the losses from its plantation division with the commissioning of its newly constructed largest palm oil mill in Kabupaten Landak that is equipped with production capacity of 60 metric tonne per hour, which is capable of producing both crude palm oil (CPO) & crushed palm kernel.

Oil & Gas. Last year, AZRB acquired the remaining 51% equity stake in Tok Bali transforming them from a pure bunkering business to pure supply base that supplies fuel & water, mechanical handling & equipment, bonded warehouse, CIQ, and office space. While its Tok Bali supply base currently has only 22 customers, management is targeting to achieve 100 customers to operate in Tok Bali by year-end, leveraging on its strategic location as the only port in Kelantan with potential customer like Petronas Carigali, Coastal Energy, Carigali Hess, and etc.

Outlook

We see that FY17 as an inflection point for AZRB underpinned by the potential turnaround of its plantation division should its palm oil mill takes off smoothly, coupled with higher earnings contribution from the acquisition of the remaining 51% stake in Tok Bali. Its construction division to continue to grow on the back of its outstanding order-book of RM3.9b.

Risk

• Delays in construction works.
• Sharp increase in raw material costs.
• Cost overrun in commissioning of palm oil mill.

Conclusion

Post-conference, we are feeling positive with AZRB’s outlook backed by its turnaround story in its plantation division, which could potentially grow its FY16 by 80-100% should they are able to stem the losses. Currently, it is trading at FY16E PER of 20.2x.

Source: Kenanga Research - 19 Apr 2017