Ahmad  Zaki’s  9M14  results  disappointed.  We  lower  our  FY14/FY15 earnings  forecasts  by 31%/10%  and TP  by 4% to  MYR0.92  (implying a 30% upside) but maintain our BUY call. We project its net profit to triple between FY14 and FY16,  backed by improved construction profits and reduced  plantation  losses.  We  like  Ahmad  Zaki  for  its  sizeable  order backlog, concession assets and oil palm plantations in Indonesia.

Bunkering the key culprit.  Ahmad Zaki’s 9M14 net profit  disappointed at  only  61% of our full-year forecast. The key variance came from lowerthan-expected bunkering profits as a result of a temporary  slowdown in offshore  activities  by  certain  customers  (consensus  estimates  are  not meaningful due to a small sample size).   

Strong earnings growth. We project Ahmad Zaki’s net profit to triple  to MYR35.4m  in  FY16  from  MYR11.5m  in  FY14  backed  by:  i)  improved construction profits as key construction jobs hit major billing milestones, ii) reduced plantation losses as its oil palm plantation in In donesia begins to attain maturity, and iii) organic growth at its bunkering operation.

Forecasts.  We  cut  our  FY14/FY15  earnings  forecasts  by  31%/10% respectively to factor in the temporary weakness in bunkering profits.

Risks.  These include: i) construction job  wins in FY14-16 falling short of our assumption of MYR500m p.a., and ii) an escalation in input costs.

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 MYR1.96bn (that can already last for  2-3  years)  (see  Figure  2)  will  increase  to  MYR3.51bn  when  the MYR1.55bn East Klang Valley Expressway (EKVE) hits the ground in 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  International  Islamic University of Malaysia (IIUM) Teaching-Hospital (under construction) and the EKVE  (under planning). In addition, there is  tremendous value in its 21,000ha  oil  palm  plantations  (23%  planted)  in  West  Kalimantan, Indonesia. We reduce our TP by 4% to MYR0.92 (from MYR0.96) based on SOP valuation (see Figure 3).

Source: RHB