We maintain our BUY call, but revise  down our FY14-15 EPS  forecasts by 53%/49%  and  FV by 28% to MYR0.96 (from MYR1.33). This factors  in a 75% increase in share base arising from a 6-for-8 rights issue.  Ahmad Zaki  is  a  good  small-cap  proxy  to  public  infrastructure  spending.  We also like the company for its concession assets and oil palm plantations in Indonesia.

• Seed monies  for growth.  While rights share issues generally do not go down well with investors as they are earnings-dilutive, we believe the one Ahmad Zaki is undertaking should be viewed differently. This is because the  proceeds  will  be  immediately  put  into  productive  use,  as  equity  or seed  monies  for  two  new  concessions,  ie  the  MYR413m  International Islamic  University  Malaysia  (IIUM)  Teaching-Hospital  in  Kuantan  based on  a  private  finance  initiative  (PFI)  model,  and  the  MYR1.55bn  East Klang  Valley  Expressway  (EKVE).  To  recap,  the  company  is  raising MYR103.3m from a 6-for-8 rights issue (MYR0.50 issue price) with 3-for-8  free  10-year  warrants  (MYR0.70  exercise  price).  The  exercise  will boost  its share base by 75% to 483.5m share s  (and by another 21% to 586.8m shares on full conversion of the warrants). We estimate that  the rights proceeds will reduce its net debt and gearing to MYR86m and 0.3x from MYR188m and 0.9x respectively as at 31 Dec 2013.
• Forecasts.  We  revise  down  our  FY14-15  EPS  forecasts  by  53%/49% respectively largely to factor in the enlarged share base.
• Maintain  BUY.  Ahmad  Zaki  is  a  good  small-cap  proxy  to  public infrastructure  spending  given  its  involvement  in  the  construction  of  the Klang  Valley  MRT  project  and  various  government  facilities.  Its  current outstanding  construction  orderbook  of  MYR1.9bn  (that  can  already  last for  2-3  years)  will  surge  by  80%  to  MYR3.5bn  when  the  MYR1.55bn EKVE hits the ground over the immediate term. We also like Ahmad Zaki for  its  stable  of  concession  assets  comprising  a  highly  profitable bunkering  operation  at  the  Kemaman  Supply  Base  in  Terengganu,  the IIUM  Teaching-Hospital  under  construction  (26%  completed)  and  the EKVE  under  planning.  In  addition,  there  is  tremendous  value  in  its 21,000-ha  oil  palm  plantations  (23%  planted)  in  West  Kalimantan, Indonesia.  Our  FV  is  rationalised  down  by  28%  to  MYR0.96  (from MYR1.33) based on SOP valuation (see Figure 2).

Financial Exhibits

SWOT Analysis

Company Profile

Ahmad Zaki (AZRB)  is primarily  a  construction  company. It owns a concession to operate  bunkering at  the  Kemaman Supply Base in Terengganu.  It also has two concessions currently under construction/planning, namely  the MYR413m International Islamic University Malaysia (IIUM) Teaching  Hospital in Kuantan  based on a PFI  model,  and the MYR1.55bn EKVE.  It also owns about 21,000  ha of plantation land in East Kalimantan, Indonesia, out of which about 5,000 ha are planted.

Recommendation Chart

Source: RHB