AZRB (7078) - AZRB seems focused on plantation division turnaround


Ahmad Zaki Resources Bhd
(July 4, RM1.18)
Trading buy with a fair value (FV) of RM1.35: Ahmad Zaki Resources Bhd’s (AZRB) turnaround story on its plantation division in the medium term is highly appealing should they be able to narrow its losses in the plantation division substantially upon commissioning its own palm oil mill. Projecting financial year 2017 (FY17) and FY18 earnings to grow by 111.1% and 27.1% respectively.

While AZRB is known to be a bumiputera contractor that had bagged several high-profile jobs such as the mass rapid transit 1 (MRT1) and MRT2 in the past, it has several other divisions under its belt like the plantation, property, oil and gas (O&G) and concession. However, not all of its divisions have shone especially its plantation division, which has been a drag on its group earnings due to consecutive losses in the past as it was unable to command a decent rate for its fresh fruit bunches (FFBs) as there is no palm oil mill near its plantation land in West Kalimantan, Indonesia.

Due to accumulated losses in its plantation division, it is currently in a negative equity position. However, management is determined to turn its plantation division around by tackling the problem at its core by commissioning a palm oil mill with a production capacity of 60 tonnes per hour within its plantation area to convert its FFBs into crude palm oil (CPO), which would allow them to sell CPO at better prices as its FFBs would be a direct feed to its palm oil mill.

While one-third of its palm oil mill capacity would be used to convert its own FFBs, the remaining two-thirds of its capacity would be used to convert FFBs from its neighbouring plantations that are Wilmar, Charoen Pokphand and Louis Drefyus Co for the first year of operation.

The management is targeting to bring its plantation division to break-even levels by year end. Even if this division is able to achieve profitability in the future, we do not rule out the option to dispose of this division.

While management is attempting to achieve break-even levels for its property division and grow its O&G division through the acquisition of the Tok Bali support base in Kelantan, its construction division remains its bread and butter with an outstanding order book of RM3.7 billion that would last them for another three years.

That said, with its current tender book of more than RM5 billion we believe management’s target replenishment of RM600 million to RM700 million for the year to be achievable. The property division should provide a steady recurring income to the group for the maintenance of the International Islamic University Malaysia Medical Centre.

We are projecting its FY17 and FY18 earnings to grow by 111.1% and 27.1% respectively as we are anticipating the losses from its plantation division to narrow substantially, coupled with better earnings contribution from its construction and property divisions, while expecting a flattish growth from its O&G division in the medium term.

We are rather positive about AZRB’s prospects, especially on the potential turnaround of its plantation division, which is the major booster to our net profit growth projections.

Our sum-of-parts (SoP)-driven FV of RM1.35 is derived after ascribing 20% discount to its SoP value of RM1.68, and it implies FY18 price-earnings ratio (PER) of 9.8 times lower than the mid-cap average of 12.2 times coupled with 23% upside from current levels, and we have yet to factor in the potential value from its highway concession, which is expected to be operational by 2019. — Kenanga Research, July 4


AZRB (7078) - AZRB seems focused on plantation division turnaround

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