We  maintain  our  BUY  call,  but  cut  FY13F/14F  by  41%/29%  and  FV  by 10% to MYR1.33 (from MYR1.47) respectively. This follows Ahmad Zaki’s 1H13 results coming in below expectations. Its outlook remains positive, as the construction sector’s fundamentals are strongly backed by mega infrastructure,  property,  and  oil  &  gas  projects.  We  also  like  its defensive non-construction businesses. Maintain BUY.

- Weak 1H13.  Ahmad Zaki’s 1H13 net profit missed expectations, coming in at only 15%/18% of our/consensus full-year forecasts.  We believe the variance against our forecast came largely from the larger-than-expected plantation  losses,  which  stemmed  from  the  young  age  profile  of  the group’s  oil  palm  plantations,  as  well  as  from  lower-than-expected construction margins realised.   

- Forecasts.  We are  cutting  FY13  and  FY14  net  profit  forecasts by  41% and  29%  respectively,  after  factoring  in  the  larger  plantation  losses  and lower construction margins.

-  Risks.  These include:  i)  new  construction  contracts secured  in  FY13-14 coming in below our target of MYR500m per annum, and ii) escalation in input costs.

- Maintain BUY.  The fundamentals of the construction sector are strongly backed  by  on-going  and  shovel-ready  mega  infrastructure, property  and oil  &  gas  projects.  Hence,  we  like  Ahmad  Zaki  for  its  strong  earnings visibility backed by  its MYR2bn outstanding construction orderbook (see Figure  1).  The  group  also  holds  two  lucrative  concessions  with  a minimum  project  IRR  of  8%,  ie  the  MYR413m  International  Islamic University  Malaysia  (IIUM)  in  Kuantan,  Pahang,  which  is  under construction, and the MYR1.55bn East Klang Valley Expressway (EKVE), pending a financial close.  Upon achieving this, EKVE will also generate about  MYR1.5bn  worth  of  internal  construction  work  for  Ahmad  Zaki, substantially  boosting  its  outstanding  construction  orderbook  to MYR3.5bn.  We  also  like  the  group  for  its  defensive  non-construction businesses,  such  as  bunkering  and  plantation  (see  Figure  2).  FV, however,  is cut  by  10% to  MYR1.33  (from  MYR1.47),  based  on sum-of-parts valuation (see Figure 3).  

Source: RHB