‘SMALL CAPS ARE SAFE HAVENS’
Analysts expect better share price growth compared with pure-play companies
AHMAD Zaki Resources Bhd (AZRB) is sending out signals to investors that small-cap construction companies with diversified revenue streams are safe havens for those looking to receive high capital appreciation in the near term.
These small-cap companies were expected to beat pure-play construction companies in share price growth as the latter were finding it difficult to gain higher revenue recognition from mega projects, with tepid earnings expected in the first half of the year, said analysts.
AZRB group chief operating officer Datuk Roslan Jaffar told NST Business it was optimistic of achieving higher earnings upside this year on the back of the bullish construction industry as well as higher contribution from other divisions.
It is bidding for mega projects such as the Mass Rapid Transit 3, Light Rail Transit 3 and Tun Razak Exchange, among others.
The company is working to add at least another RM700 million to its current order book of RM3.9 billion this year.
Its oil and gas division’s Tok Bali supply base in Kelantan will also start contributing to its earnings this year while its plantation division will achieve a break-even point after a RM20 million revenue upside. Its property division is also expected to continue its earnings uptrend.
If things go as planned, its equity return will show a strong increase year-on-year.
An analyst had forecast earnings per share growth of 100 per cent this year for AZRB.
Last week, it announced a 45.7 per cent increase in first-quarter net profit to RM6.12 million, from RM4.2 million a year ago, on improved margin of construction projects.
AZRB has a market capitalisation of RM558.12 million as of Friday.
Malaysian Association of Technical Analysts director Nazarry Rosli said small-cap stocks such as Gabungan AQRS Bhd and Muhibbah Engineering (M) Bhd were also rated “buy”.
This is because they are fundamentally strong with potential earnings upside this year, driven by strong construction order book and other revenue stream from airport concession, facilities management and property development.
Gabungan AQRS had a market capitalisation of RM550 million, with year-to-date total return of 55.8 per cent in share price, while Muhibbah had RM1 billion market capitalisation, with year-todate total return of 26.9 per cent in share price, as at May 26.
MIDF Research projected that earnings in the first half of the year would be anaemic for pureplay construction companies as they depended only on mega construction or infrastructure projects.
It said this was due to lower revenue recognition from major projects, lower margin profile from major infrastructure projects and quarterly trends.
“The disparity between pricebook and price-earnings ratio for the Kuala Lumpur construction index proposes that long/short position of construction companies to be guided on earnings yield spread,” it said.
This was despite the strong surge in construction activities coupled with high liquidity/loans to the sector, it added.
MIDF Research favours construction companies with strong core competency and diversified revenue streams.