• FV of MYR1.04 on 13x FY25F P/E. Azam Jaya intends to raise MYR61.5mfrom the public issue of 78.8m new shares and an offer of 50m shares at anIPO price of MYR0.78 – mainly for working capital expansion to furtherstrengthen its capability in construction projects in Sabah (particularlyroads). Future earnings will be anchored by its strong focus on highwayinfrastructure. An icing on the cake would be if the group clinched new jobsrelated to the upgrading of schools in the state – Azam Jaya was involved inthis segment between 2010 and 2018.

• Commendable orderbook prospects. The group has MYR1.5bn worth ofoutstanding construction orderbooks (spread over nine jobs) as at 20 Sep, iethe latest practicable date or LPD. This translates into an orderbook/revenuecover ratio of 5.3x based on FY23’s construction topline. Around 78% of thetotal outstanding orderbook is made up of the Pan Borneo Highway SabahPhase 1B packages that were secured in FY24. Aside from upcoming phasesfor the Pan Borneo Highway Sabah project, the Government has alsoearmarked c.MYR13bn for various infrastructure projects in the state. Thesaid allocation includes MYR5.8bn for roads, bridges, and buildings; MYR5bnfor infrastructure in villages; and MYR1.7bn for under-privileged schools.The remaining MYR0.4bn balance is for clinics and hospitals.

• Earnings estimates. We are projecting a 3-year earnings CAGR of 19.8% forAzam Jaya, largely in tandem with higher progress billings in the next threeyears from three newly secured Pan Borneo Highway jobs in FY24 worthMYR1.2bn. Moreover, the group has been able to reduce the portion ofsubcontractor costs (out of the total construction cost of sales) to 23.4% in1H24 vs 66.1% in FY21. This was made possible by expanding its fleet ofmachinery and equipment, which may enable more control over projecttimelines and quality. This is because subcontractors might undertakemultiple construction projects and not prioritise Azam Jaya’s projects.

• Valuation. For peer comparison purposes, we chose construction playersinvolved in infrastructure works (particularly roads) such as Gabungan AQRS(AQRS MK, BUY, TP: MYR0.53), Gadang (GADG MK, NR), Vestland (VLB MK,NR), and IJM Corp (IJM MK, BUY, MYR4.39). We believe this target valuationof 13x is justified, as it is within our 12-15x range ascribed to the majority ofsmall- to mid-cap contractors under our coverage. Our target valuation isalso derived by applying a small-cap discount of c.30% to the market capweighted average P/E of 18.5x of the selected peers. At an IPO price ofMYR0.78, the stock is trading at 9.7x FY25F P/E, which is lower than theBursa Malaysia Construction Index’s 5-year mean of 12-13x – we deem thisto be undervalued in light of the strong infrastructure prospects in Sabah.

• Key risks: Unexpected delays or interruptions in completing constructionprojects, unexpected rise in building material prices, and slower-thanexpected job wins.

Source: RHB Research - 24 Oct 2024

Source: RHB Securities Research - 24 Oct 2024