We  maintain  our Buy  call,  core  forecasts  and  MYR1.47  FV  following  an arbitrator’s SAR92.6m (MYR79.6m) award to Ahmad Zaki in relation to a contract dispute in Saudi Arabia.  Owing to improved sentiment post the general  election,  we  see  sustained  interest  in  small-cap  construction stocks.  We  also  like  Ahmad  Zaki’s  defensive  non-construction businesses such as bunkering and plantations.

- A  major  arbitration  win.  Paris-based  International  arbitrator, International Chamber of Commerce, has ordered Alfaisal University/King Faisal Foundation to pay Ahmad Zaki SAR92.6m (MYR79.6m) in respect of  the  latter’s  claims  in  an  arbitration  case  involving  a  construction contract for Phases 1 & 2 of Alfaisal University Campus in Riyadh, Saudi Arabia.  This is good news for Ahmad Zaki as the company can now write back  the  entire  amount  as  an  exceptional  gain,  which  will  translate  into 29 sen per share.  When the contract ended in dispute in FY10, Ahmad Zaki  bit  the  bullet  by  making  full  provisions  for  additional  costs  incurred by  the  project  amounting  to  MYR93.6m  in  its  FY10  accounts.  This resulted in a record net loss of MYR61.6m for that year.

- Forecasts.    We  maintain  our  estimates  as  we  exclude  one-off  items  in our forecasts and await full settlement of the award. Assuming the award is paid, the MYR79.6m cash inflow will significantly reduce Ahmad Zaki’s net  debt  and  gearing  of  MYR109.5m  and  0.52x  respectively  as  at  31 March 2013 to MYR29.9m and 0.1x.      

-  Maintain  BUY.  We like  Ahmad  Zaki’s strong  earnings  visibility,  backed by  its  MYR2.2bn-strong  outstanding  construction  orderbook  (see  Figure 1),  as  well  as  two  lucrative  concessions  with  a  minimum  project  IRR  of 8%  in  the  MYR413m  International  Islamic  University  Malaysia  (IIUM) campus  in  Kuantan  now  under  construction,  and  the  MYR1.55bn  East Klang  Valley  Expressway  (EKVE),  which  is  pending  financial  close.  Upon  financial  close,  the  EKVE  will  generate  about  MYR1.5bn  worth  of internal construction works for Ahmad Zaki, as well as substantially boost its  outstanding  construction  orderbook  to  MYR3.7bn.  We  also  favour Ahmad  Zaki  for  its  defensive  non-construction  businesses  of  bunkering and plantations (please see Figure 2). Our MYR1.47 FV is based on SOP (Figure 3). 

Source: RHB