We  cut  our  FY13  forecast  by  26%  but  maintain  our  BUY  call  and MYR1.33  FV.  This  followed  the  release  of  AZRB’s  9M13  results  which missed  expectations  due  to  a  MYR5.9m  provision  for  construction losses in 3Q13. Besides being a small-cap proxy to public infrastructure spending, we  like  the company  for  its  concession assets  (bunkering,  a university and a toll road) and oil palm plantations in Indonesia.

• Hurt  by  provision  in  3Q13.  Ahmad  Zaki  (AZRB)’s  9M13  net  profit missed  expectations, coming in  at  only 33%/36% of our/consensus  fullyear forecasts respectively. We believe the variance to our forecast came from  a MYR5.9m provision  for construction receivables  in 3Q13.  AZRB’s 9M13 net profit contracted 71% due to: i) lower construction profits on the back  of  weaker  billings  and  margins,  coupled  with  the  provision  as mentioned, and ii) widened plantation losses on increased initial losses from expanded new planted areas.     
• Forecasts.  We  cut  our  FY13  net profit forecast by  26%  to factor in the MYR5.9m provision for construction receivables.
• Risks. These include: i) new construction contract wins in FY13-14 to fall short of our target of MYR500m per annum, and ii) an escalation in input costs.
• Maintain  BUY.  Ahmad  Zaki  is  a  good  small-cap  proxy  to  the  local construction  sector  with  strong  prospects,  underpinned  by  an  extended upcycle  driven  by  the  MYR73bn  Klang  Valley  MRT  project,  which  will keep  players  busy  until  2019.  Apart  from  a  strong  outstanding construction orderbook  amounting to  MYR2.1bn  (see Figure 1),  Ahmad Zaki  also owns three lucrative concessions  ie: i) a bunkering operation  in Kemaman  Supply  Base  (in  operation),  ii)  the  MYR413m  International Islamic  University  Malaysia  (IIUM)  in  Kuantan,  Pahang  (under construction),  and  iii)  the  MYR1.55bn  East  Klang  Valley  Expressway (EKVE)  (pending  financial  close).  Upon  achieving  the  financial  close, EKVE will also generate about MYR1.5bn worth of  internal construction work  for  Ahmad Zaki,  substantially boosting its outstanding construction orderbook to MYR3.6bn. We also  see value in its oil palm plantations in Indonesia.  Our  FV  is  unchanged  at  MYR1.33,  based  on  sum-of-parts valuation (see Figure 3).

Financial Exhibits

SWOT Analysis

Company Profile
Ahmad Zaki is construction company.  It is also engaged in non-construction businesses including a bunkering operation at Kemaman Supply Base, oil palm plantation in West Kalimantan, and the design, build, lease, maintain and transfer (DBLMT) of a teaching hospital for the International Islamic University Malaysia (IIUM) in Kuantan under the Private Finance Initiative (PFI).

Recommendation Chart

Source: RHB