AZRB’s turnaround story on for its plantation division in the medium term is highly appealing should they be able to narrow its losses in the plantation division substantially upon commissioning its own palm oil mill. Projecting FY17- 18E earnings to grow by 111.1%-27.1%, respectively. Trading Buy with SOP-driven Fair Value of RM1.35. Our Fair Value implies FY18E PER of 9.8x lower than mid-cap average of 12.2x, representing 23% upside from current levels.

More than just a contractor. While AZRB is known to be a bumi contractor that had bagged several high-profile jobs in the past MRT1 and MRT2, it has several other divisions under its belt i.e. plantation, property, oil & gas and concession. However, not all of its divisions have shone especially its plantation division, which have been a drag on its group earnings due to consecutive losses in the past as they are unable to command a decent rate for their FFBs as there is no palm oil mill nearby their plantation land in West Kalimantan, Indonesia. Due to accumulated losses in its plantation division, it is currently in a negative equity position.

Plantation division set for turnaround. However, management is determined to turn its plantation division around by tackling the problem at its core by commissioning a palm oil mill with a production capacity of 60 metric tonne/hour within its plantation area to convert its FFBs into CPO, which would allow them to sell CPO at better prices as its FFBs would be a direct feed to its palm oil mill. While 1/3 of its palm oil mill capacity would be used to convert its own FFBs, the remaining 2/3 of its capacity would be used to convert FFBs from its neighbouring plantations, i.e. Wilmar, Charoen Pokphand and Louis Drefyus Company for the first year of operation. The management is targeting to bring its plantation division to breakeven levels by year end. Even if this division able to achieve profitability in the future, we do not rule out the option to dispose off this division.

Bread and butter still construction… While management is attempting to achieve breakeven levels for its property division and grow its oil & gas division through the acquisition of Tok Bali support base, its construction division remains its bread and butter with an outstanding orderbook of RM3.7b that would last them for another 3- years. That said, with its current tender book of more than RM5.0b we believe management’s target replenishment of RM600.0-700.0m for the year to be achievable. That said, its property division should provide a steady recurring income to group for the maintenance of International Islamic University Malaysia Medical Centre (IIUM).

Earnings to take off. We are projecting its FY17-18E earnings to grow by 111.1%-27.1%, respectively as we are anticipating the losses from its plantation division to narrow substantially, coupled with better earnings contribution from its construction and property divisions, while expecting a flattish growth from its oil & gas division in the medium term.

Trading Buy with FV of RM1.35. We are rather positive with AZRB’s prospects, especially on the potential turnaround of its plantation division, which is the major booster to our net profit growth projections. Our SOP-driven Fair Value of RM1.35 is derived after ascribing 20% discount to its SOP value of RM1.68, and it implies FY18E PER of 9.8x lower than mid-cap average of 12.2x coupled with 23% upside from current levels, and we have yet factored in the potential value from its highway concession, which is expected to be operational by 2019. (Refer overleaf for details).

Source: Kenanga Research - 4 Jul 2017