AZRB (FV RM0.91 - NEUTRAL) FY11 Results Review: Cautious on Subpar FY11

Ahmad  Zaki’s (AZRB) FY11 earnings of RM12.1m fell short of  our expectations and only met 58.9% of our full-year estimates on the back of weakness in both its construction and bunkering divisions. With that, we are turning slightly cautious on its future prospects and hence, we are lowering our FY12 and FY13 core earnings forecasts by 6.0% and 3.1% respectively. Downgrade to NEUTRAL and our FV now stands at RM0.91 based on an unchanged FY12 PER of 10x.

Significantly below estimates. AZRB’s FY11 revenue  surged 23.7% y-o-y to close at RM533.7m, driven by higher contribution from its construction division which registered a 25.8% jump to RM469.1m. Nonetheless, its core earnings of RM12.1m (+>100% y-o-y due to losses in FY10) still fell short of our expectations by coming in  at 58.9% of  our full-year estimates. Our estimates have previously accounted for a better showing from its bunkering division, which actually registered a dip of 30.2% at the EBIT level, as well as some margins improvement for its construction segment, which also did not materialize. On a quarterly basis, 4QFY11 topline  and core earnings  came in at RM141.0m and RM2.9m respectively, dragged down by its bunkering division’s  subpar performance.

Subpar margins the main concern. On a positive note, AZRB is currently sitting on a comfortable orderbook of RM1,978m with  the bulk of it coming from the RM765m v6 MRT package, RM160m University Darul Iman Package 3 building works and construction of the RM413m International Islamic University Malaysia Teaching Hospital in Kuantan. Nonetheless, we are turning cautious on its execution track record in view of its below-average construction margins as well as early indications of potential weakness in its bunkering division. With that, we are downgrading our core earnings forecasts by 6.0% for FY12 and 3.1% for FY13.

Downgrade to NEUTRAL. All in all, we are taking a more conservative stance on AZRB for now given the disappointing set of results, which  we believe could point to  further execution risks in light of the volatility of its past earnings. Hence, we downgrade our call from Trading Buy to NEUTRAL with our FV now standing at RM0.91 based on an unchanged FY12 PER of 10x.

Source: OSK188