We maintain our BUY call, forecasts and MYR1.33 FV following  Ahmad Zaki’s  proposed  6-for-8  rights  issue  with  three  free  warrants.  The MYR103.9m rights proceeds  will be used largely to fund two greenfield concessions, ie  a  teaching  hospital and a highway. Apart from being a small-cap proxy to public infrastructure spending, we like the company for its concessions and oil palm plantations in Indonesia.

• Beefing  up  balance  sheet  to  fund  new  projects.  Ahmad  Zaki  has proposed  a  rights  issue  with  free  warrants  on  the  basis  of  six  rights shares and three free warrants for every eight shares held. The  207.7m rights  shares  (MYR0.25  par  value),  at  an  issue  price  of  MYR0.50,  will raise  MYR103.9m,  which  will  largely  be  used  to  fund  two  new concessions, ie the MYR413m International Islamic University Malaysia (IIUM)  teaching  hospital  and  the  MYR1.55bn  East  Klang  Valley Expressway (EKVE). The exercise price for the 10-year warrants is fixed at MYR0.70. Separately, Ahmad Zaki proposed a par value reduction for its  276.8m  existing  shares  to  MYR0.25  from  MYR0.50.  A  credit  of MYR69.2m  arising  from  the  exercise  will  largely  be  used  to  offset accumulated losses.
• Dilutive  but  necessary.  Based  on  our  calculations,  the  rights  shares and warrants will dilute our FY14 EPS forecast by 33% to 4.9 sen from 7.1  sen.  Based  on  Ahmad  Zaki’s  last  traded  price  of  MYR0.91,  the theoretical  ex-price  is  MYR0.674,  assuming  a  MYR0.28  FV  for  the warrants –  based on our estimates. This compares with our rationalised (ie  ex-all and fully-diluted) MYR0.77  FV  (from MYR1.33) still giving the stock a 14% upside. The rights issue will reduce Ahmad Zaki’s net debt and gearing of MYR148.4m and 0.7x (as at 30 Sept 2013) to MYR44.5m and 0.14x respectively.
• Forecasts.  Maintained pending the completion of the exercise.
• Maintain  BUY.  Ahmad  Zaki  is  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. We also like the  company  for  its  concession  assets  (bunkering  operation s,  and  a hospital  and  toll  road  under  construction)  and  oil  palm  plantation  in Indonesia.  Pending  the  completion  of  the  exercise,  FV  is  kept unchanged at MYR1.33 based on SOP 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  the Kemaman Supply Base  in Terengganu,  an 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 in Kuantan under the Priv ate Finance Initiative (PFI).

Recommendation Chart

Source: RHB