30 JEWELS 2013 Edition
Ahmad Zaki Resources
52-wk Price low/high (MYR) 0.67 - 1.09
Hidden Value In Bunkering, Plantation & Concessions
¨ A small-cap proxy to public infrastructure spending in Malaysia
¨ Good construction earnings visibility backed by MYR2bn outstanding construction orderbook, MYR1.5bn EKVE internal works and potential new contract wins
¨ Tremendous value in non-construction businesses, ie bunkering operation, plantation and concessions
Ahmad Zaki is a construction company which is also engaged in nonconstruction businesses. These include: i) a bunkering operation at Kemaman Supply Base, Terengganu; ii) an oil palm plantation in West Kalimantan, Indonesia; and iii) the design, build, lease, maintain and transfer (DBLMT) of a teaching hospital for the International Islamic University Malaysia (IIUM) in Kuantan, Pahang, under the Private Finance Initiative (PFI).
More sustained interest in small-cap contractors. Given improving sentiment post the 13th General Election, we expect more sustained interest in small-cap construction stocks, in addition to big-cap ones.
Strong sector fundamentals. The fundamentals of the construction sector are strong on good earnings visibility backed by ongoing mega projects, such as the: i) MYR23bn Line 1 (Sg Buloh-Kajang Line) of the Klang Valley MRT project, ii) MYR60bn Refinery and Petrochemical Integrated Development (RAPID) in Pegerang, Johor, iii) MYR383bn Iskandar Malaysia, and iv) MYR334bn Sarawak Corridor of Renewable Energy (SCORE).
In addition, there is a long list of shovel-ready mega infrastructure projects, including the: i) MYR25bn Line 2 (Sg Buloh-Serdang-Putrajaya Line) of the Klang Valley MRT project, ii) MYR8bn Gemas-Johor Bahru double tracking project, iii) MYR7bn West Coast Expressway, and iv) MYR10bn Pan Borneo Highway. Meanwhile, shovel-ready mega property projects include the: i) MYR26bn Tun Razak Exchange (TRX), ii) MYR15bn Bandar Malaysia, iii) MYR10bn Kwasa Damansara, and iv) MYR5bn Warisan Merdeka Tower.
Steep discount to break-up value. We also like Ahmad Zaki for the steep discount it is trading at to its break-up value. While its market capitalisation now stands at about MYR277m, its bunkering operation alone is worth MYR150m (assuming 10x recurring annual net profit of MYR15m) while its plantations in East Kalimantan have a market value of MYR250m. Net gearing is manageable at only 0.4x.
Strong orderbook and concession assets under construction. Ahmad Zaki has a construction orderbook of MYR2bn and two lucrative concessions with a minimum projected IRR of 8%, ie the MYR413m IIUM works in Kuantan (under construction) and MYR1.55bn East Klang Valley Expressway (EKVE) (pending financial closure). Upon achieving financial closure, EKVE will generate about MYR1.5bn worth of internal construction works for the Group, substantially boosting its outstanding construction orderbook to MYR3.5bn from MYR2bn currently.
Company Report Card
Latest results. FY12 net profit surged 70% thanks largely to significant improvements in construction billings and margins, as key construction jobs achieved major billing milestones, while its bunkering operation posted single-digit organic growth.
Balance sheet / Cashflow. As at 31 Dec 2012, Ahmad Zaki’s net debt and gearing were manageable at MYR87.2m and 0.4x respectively. The Group registered a negative free cashflow of MYR42.6m in FY12, mainly fuelled by increased construction receivables and substantial capital expenditure incurred on purchases of plant and equipment, as well as oil palm planting costs.
ROE. ROE of 10.1% in FY12 (up substantially from 6.4% in FY11) was fairly consistent with industry average of 11%. We project Ahmad Zaki’s ROE to rise above 12% in FY13-FY14 on improved earnings.
Dividend. The Group’s FY12 dividend amounted to 2 sen per share less tax, which translated into a net yield of 1.5%.
Management. At the helm of Ahmad Zaki is founder and executive vice chairman Dato’ Sri Haji Wan Zaki. Prior to starting the Company in 1984, he had a professional career spanning about 14 years working for State-owned companies like Pesama Timber Corporation, Pesaka Terengganu and Syarikat Permodalan Pahang.
RecommendationApart from good construction earnings visibility, backed by MYR2bn outstanding construction orderbook, MYR1.5bn internal works from EKVE and potential new contract wins, we also like Ahmad Zaki for its defensive non-construction businesses such as bunkering and plantation. Our MYR1.47 valuation is based on a “sum-of-parts” methodology.