We maintain our Buy call, forecasts and fair value of MYR1.47 following the release of 1QFY13 results that came in within expectations.  On improved sentiment post the 13th general election, we believe the buying spree will eventually spill over to small-cap construction stocks from big-cap ones.  We also like Ahmad Zaki for its defensive non-construction businesses such as bunkering and plantation.

-  Weak 1Q, but stronger quarters ahead.  1QFY13 net profit came in at only 11% of our full-year forecast and the full-market consensus net profit.  However, we consider the results within expectations as 1Q is typically a seasonally weak quarter as it embraces the impact of the long Chinese New Year break.  In addition, during the quarter, profit recognition came largely from low-margin jobs.  Similarly, the bunkering operation reported weak numbers, we believe, due to the timing and a reduced degree of intensity in terms of oil & gas activities off the east coast of Peninsular Malaysia during the quarter, resulting in volatility in demand for marine fuels.  We expect all these to normalise over the remaining quarters.

-  A defensive side that  is under-appreciated.  The company is beginning to see the fruit of its labour of having grown some defensive non-construction businesses, i.e. bunkering operation at Kemaman Supply Base, oil palm plantation in West Kalimantan, and the design, build, lease, maintain & transfer (DBLMT) of a teaching hospital for the International Islamic University Malaysia (IIUM) in Kuantan under the Private Finance Initiative (PFI) (see  Figure 3 for more details on these three businesses).  With their defensive, recurring and less cyclical incomes, these three businesses will materially boost the sustainability, visibility and resilience of Ahmad Zaki’s earnings.   

- Maintain Buy.  Post the 13th general election, we believe investors should refocus on sector fundamentals that are reasonably attractive underpinned by a construction upcycle.  We also like Ahmad Zaki for its defensive non-construction businesses such as bunkering and plantation.  Fair value is MYR1.47 based on “sum of parts” (see Figure 5).

Source: RHB