AZRB, New Favourite Son

Ahmad Zaki Resources Bhd’s (AZRB) share price surged to a historic high of RM4.50 as investors were upbeat on the company’s acquisition of a 20.8% stake in Eastern Pacific Industrial Corporation (EPIC). The acquisition of the EPIC stake would provide AZRB with a larger exposure to the East Coast Corridor. The acquisition of the stake from Lembaga Tabung Haji for RM82.56 million or RM2.40/share via cash settlement was at a 25% discount to its estimated fair value of RM3.00 on EPIC.

The East Coast Corridor was earmarked for the development as the hub of Malaysia's petrochemical industry. Remembering that EPIC is actually the defacto state government oil & gas vehicle: this makes it even more incredible that AZRB got to buy that stake. My new favourite son! With increasing O&G offshore activities at the port, AZRB would gain an even larger exposure to the East Coast boom via its 20.8% stake in EPIC and its 100%-owned cash-cow O&G bunkering services at the Kemaman Port. This would allow AZRB to diversify its earnings from the cyclical construction arm.

The history of the AZRB Group began on 17 February 1982. Its first contracting job was landscaping works for a housing project owned by Terengganu State Economic Development Corporation in Kemaman, Terengganu. In April 1984, the company secured its first major contract, which was the construction and completion of an external drainage system for the gas export terminal at the Kemaman Port. Since then, AZRB has successfully secured contracts from government and semi-government agencies and the private sector. These include, amongst others, Jabatan Kerja Raya Malaysia, Majlis Amanah Rakyat, Yayasan Islam Terengganu, Kuala Lumpur City Centre Berhad, KLIA, Majlis Perbadanan Petaling Jaya, University of Malaya and International Islamic University of Malaysia.

The group made RM24.15 million net profit on a RM442.6 million revenue last year. Its construction division has ventured into India and Saudi Arabia. At home, it bid for construction packages under the East Coast Expressway, Phase 2 project and managed to win three deals totalling RM324 million. Last year, AZRB's oil bunkering activities at Kemaman port contributed RM9.6 million profits on RM52 million revenue. Apart from its business in oil and gas, two years ago the company bought over PT Ichtiar Gusti Pudi, a company permitted to grow oil palmtrees on a total area of 20,500ha in Indonesia including cultivation rights of 8,297ha of palm oil in west Kalimantan. So far they have planted 2,200ha. By year-end the area should expand to 4,000ha. The palm oil division should start contributing from 2010.

AZRB's unbilled orderbook stands at RM1.4 billion. Its overseas projects are the RM397.4 million Al-Faisal University constructionproject in Riyadh, Saudi Arabia and RM117 million upgrading andmaintenance of IT Expressway in Chennai, India. Both are scheduled to be completed at the end of the year. As at end 2006, AZRB has a cash reserve of RM145 million with total borrowings standing at RM63.9 million. It recently won a contract from the Public Works Department for the construction of packages 5A, 6 and 9C of Projek Lebuhraya Pantai Timur in Terengganu worth RM324.134 million. Obviously, AZRB's ties with Terenggannu are more than excellent.

The company is a lot like Ranhill. Its share capital is only 66.81m. What it is doing well is reinvesting its construction profits into the much higher margin oil & gas sector. Judging from such a small paid up, it does not take much to for the share price to double or triple from here, with EPIC's kicking in for oil & gas side. Conservative EPS (without the EPIC linkages) for FY2007 is around 43 sen already. Looking for an initial target of RM6.00. Companies like AZRB and Ranhill are the new-breed bumi companies with strong management and entrepreneurial ability, not shy to make full use of ties and connections, no alibaba mentality, just grow the business with an expansive strategy based on core competencies.