This article first appeared in The Edge Malaysia Weekly on April 3, 2017 - April 9, 2017

AHMAD Zaki Resources Bhd (AZRB), which has remained largely under the radar of investors until recently, sees 2016 as “a turning point from where the group will move on to bigger and better things”.

The civil engineering and construction group saw its net profit dip by 70% in the financial year ended Dec 31, 2013 (FY2013), to RM5.53 million from the year before, primarily dragged down by its loss-making plantation division. Its net profit has grown at double-digit rates since then, finishing FY2016 with a 13.6% gain to RM25.99 million from the previous year’s RM22.88 million.

According to group managing director Datuk Seri Wan Zakariah Wan Muda, 2016 was a turning point for the group as it surpassed the RM1 billion mark in revenue for the first time.

Revenue grew 68.2% to a record RM1.2 billion last year, with its construction segment contributing 93% of the total.

“We have been around for 35 years. But last year was an exciting time for us as we crossed the RM1 billion revenue mark for the first time. I believe 2016 was the turning point for the company towards bigger and better things. We proved that we have the capacity and capabilities at our disposal to undertake the jobs that we have procured,” the 57-year-old tells The Edge in an interview.

With the wind at its back, the group expects to carry that momentum into the current financial year on the back of a strong unbilled order book of RM3.9 billion, which will keep it busy for the next three to four years.

“With what we have done last year, I am confident that we can churn out similar revenue numbers in the coming three to four years. On top of that, we are looking to procure more jobs this year to replenish what we have completed last year,” says Wan Zakariah.

The group’s tender book stands at some RM5 billion, comprising mostly infrastructure projects in Malaysia. “Infrastructure jobs make up 55% of our tender book, followed by government buildings (20%), commercial buildings (15%) and hospitals (10%),” he says.

“We are in a good position as we have the capacity and track record of building similar projects,” he adds. In 2013, AZRB pulled off a major coup for its construction business by bagging the East Klang Valley Expressway (EKVE) contract worth RM1.55 billion — its largest project to date.

“We also hope to participate in upcoming tenders such as the East Coast Rail Line, the Kuala Lumpur-Singapore High-Speed Rail, the Light Rail Transit 3 and the Mass Rapid Transit (MRT) Line 3,” he says.

Profit-wise, AZRB expects another year of good growth. Wan Zakariah says a key challenge he sees this year is to make the group more efficient and effective — and then translate that into better profit.

He also sees a boost in earnings from its plantation division in FY2017. The unit, which started operations in 2004, has seen losses narrow in recent years —it recorded a pre-tax loss of RM26.9 million in FY2016 and hopes to break even this year.

“Our foray into the oil palm sector was to create new recurring income streams for the group and reduce our overdependence on the performance of the construction sector,” Wan Zakariah explains.

The plantation division’s pre-tax loss peaked at RM40 million in FY2015, but the unit managed to turn around following a change in management team led by its executive commissioner Abdul Halim Ashari, who joined the group in 2013. Abdul Halim has chalked up nearly 40 years in the industry, including stints at Kulim Bhd and Boustead Plantations Bhd. He was formerly president director at Indonesia’s PT BW Plantation Tbk where he oversaw the sale of the company to the Rajawali Group in 2014.

“The new management team has improved the unit’s productivity and stemmed the bleeding. Under the new team, we began to see light at the end of the tunnel,” says Wan Zakariah.

The completion of a 60-tonne per hour palm oil mill in West Kalimantan, Indonesia, will contribute to improved results this year as well, he adds.

Wan Zakariah says the new mill will eliminate the cost of transporting AZRB’s fresh fruit bunches (FFB) to third-party mills and no longer be subjected to their whims and fancy.

“During peak season, some of the (third-party) mills can turn down processing our FFB as they focus on processing their own FFB first. We are then redirected to other mills, which will lead to us incurring additional transportation costs. These mills can also dictate pricing, which may not reflect the actual value of the fruits.

“With the commissioning of our own mill this year, it will help improve sales figures,” he adds.

The group is targeting to produce 180,000 tonnes of FFB this year, of which 60,000 tonnes will come from its plantation and 120,000 tonnes from other third-party estates in the vicinity.

“We also expect favourable movements in crude palm oil (CPO) prices to contribute towards improved results as well,” says Wan Zakariah, adding that the industry’s 2017 average CPO price estimate is RM2,700 to RM2,800 per tonne.

“The plantation division will be an important contributor to our revenue moving forward. We have now planted about 8,200ha of our total 20,000ha plantation and we hope to plant up to 10,000ha by the end of this year. Our trees range from two-to-three years to eight years of age,” he says.

Still, the construction segment will remain the largest contributor to the group’s earnings and revenue growth in FY2017, driven by one of the work packages under the MRT Line 2 project worth RM1.4 billion, the EKVE, the proposed mixed-use development in Kampung Baru, Kuala Lumpur, for UDA Legasi Sdn Bhd worth RM387 million and the RM673 million PNB Hotel and Office Towers project in Jalan Sultan Ismail, Kuala Lumpur, which involves refurbishing an existing office tower and building a new hotel.

“The construction business will remain our core contributor over the next five years, with the other business divisions of oil and gas, plantation and property gradually increasing their contribution to 40% of total revenue by then. Our long-term strategy is to balance contribution from contractual income and recurring income as best as possible,” says Wan Zakariah.

Currently, AZRB has two concessions to generate recurring income, namely a 21½ -year concession to manage the International Islamic University Malaysia teaching hospital in Kuantan, Pahang, and its first toll concession to run the 35.5km EKVE for 50 years till Feb 11, 2065. “The expressway is 25% complete and is on track to finish in September 2019,” Wan Zakariah adds.

As at Dec 31, 2016, its net gearing stood at 3.4 times, based on RM2.25 billion in borrowings, cash and current investments of RM1.011 billion and shareholders’ funds of RM363.6 million.

Wan Zakariah says about 70% of its borrowings are to finance its two expressway and hospital concession assets.

According to sources, AZRB plans to raise RM30 million to RM40 million through a private placement of new shares, mainly for working capital.

To this, Wan Zakariah says: “If we land something big, capital intensive, in the next 24 months, it (raising funds from the equity market) will be something that we will seriously consider.”

As at March 14, 2017, AZRB founder and executive vice-chairman Datuk Seri Wan Zaki Wan Muda was the single largest shareholder with a 60.11% stake. Wan Zakariah and Wan Zaki are siblings. Year to date, AZRB’s share price has risen 51% to close at 96.5 sen lastThursday, giving it a market capitalisation of RM465.19 million.

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