KUCHING: Ahmad Zaki Resources Bhd (Ahmad Zaki) has been regarded as an undervalued company as its relatively unknown non-construction business ventures are starting to contribute towards the group’s overall earnings and seen as a defensive side that is ‘under-appreciated’.
RHB Research Institute Sdn Bhd (RHB Research) yesterday stated that given the very limited research coverage on Ahmad Zaki in the market at present, the company had during the recent years undergone a ‘quiet revolution’, having substantially scaled up non-construction businesses under its belt.
“Ahmad Zaki is beginning to see the fruits of its labour of having grown some defensive non-construction businesses, that are the bunkering operation at Kemaman Supply Base, oil palm plantation in West Kalimantan, and the design, build, lease, maintenance and transfer (DBLMT) of a teaching hospital for the International Islamic University Malaysia (IIUM) in Kuantan under the Private Finance Initiative (PFI).
“With its defensive, recurring and less cyclical incomes, these three businesses will materially boost the sustainability, visibility and resilience of Ahmad Zaki’s earnings,” it said, adding that for the first nine months of financial year 2012 ending December (FY12), the bunkering operation contributed about 30 per cent of total profits.
“Theoretically, a radically changed earnings profile (with enhanced stability) will appeal to a generally still risk-averse market.
“Also, theoretically, enhanced earnings stability means reduced equity risk premium, translating to higher stock valuation or a re-rating,” the research firm emphasised in a report.
The company had indicated new contract wins of about RM500 million to RM600 million in financial year FY12/13 that were most likely to come from building jobs for universities and colleges, and ‘infrastructure works in Eastern Coast Economic Region (ECER), particularly, road jobs’.
Ahmad Zaki, with a market capitalisation of RM185.4 million, presently had an outstanding construction orderbook of about RM2.3 billion, RHB Research pointed out.
The research house noted that the company in recent years had managed to break into a new segment – high-rise buildings – putting it in a good position to bid for a slew of high-rise building jobs that were coming into the market such as Tun Razak Exchange (TRX), Warisan Merdeka Tower and Harrods Hotel integrated development.
With regards to the general outlook to the sector, RHB Research noted, “We expect construction stocks to trend downwards during the early part of 2013 as the 13th General Election (GE) deadline draws closer.
“Apart from a high risk premium due to the perceived uncertain outcome of the 13th GE, we believe the market also wants to see the gap between earnings of construction companies and their lofty stock valuations bridged that we believe is more likely to happen in the second half of 2013 as key projects move up the ‘S-curve’ in terms of profit recognition.
“After the 13th GE and once the dust settles, we believe investors will refocus on fundamentals of construction stocks, that may appear to be reasonably attractive underpinned by a construction upcycle backed by various large-scale infrastructure, property and oil and gas projects driven by the government, government-linked companies or agencies, national oil company Petronas and the private sector,” the research firm opined.
It also noted two potential risks to Ahmad Zaki’s earnings forecast, namely new construction contracts secured in FY13 and FY14 coming in below its target of RM500 million per annum and escalation in input costs.
RHB Research raised the stock’s fair value by 56 per cent from 93 sen per share to RM1.45 per share (with an implied upside well over 100 per cent over its last traded price), having rationalised its in-house valuation method to a sum of parts approach from 10 times FY12 and FY13 earnings per share previously.