RHB Research has slashed its net profit forecast for Zelan Bhd by up to 10% for financial years ending March 2009 till 2011. This is in anticipation that the power plant builder will book lower earnings before interest and tax (Ebit) margins of 8% for its construction business compared to 8.5% previously.
At the same time, RHB Research also reduced its fair value for the stock’s price by 8% from RM5.53 to RM5.10. However, it kept its outpeform call for Zelan, encouraged by the builder’s RM4.2 billion construction order book, net cash of RM163.8 million and key liquid assets in the form of 82.3 million IJM Corp Bhd shares.
In a note yesterday, RHB Research said the downgrade in Zelan’s earnings came amid less favourable sentiments for Malaysian construction stocks due to the change in the local political landscape and higher input costs for the company’s operations.
However, Zelan is deemed capable of managing these challenges, the research house said. This is by virtue of the firm’s efforts to expand its global reach with new markets in Africa and Vietnam. The firm’s forward-buying of raw materials and insourcing of more work are also expected to its profit margins.
“The trend towards a more open public procurement model locally, prompted by the change in the political landscape means the demise of one key appeal of Malaysian construction companies, ie their ability to secure ‘direct-nego’ fat-margin public jobs and further delays, if not cancellation, of certain public projects,” noted RHB Research.
“The risks (for Zelan) include new contracts secured in 2008 coming in below our target of RM1 billion, and more severe-than-expected contraction in construction margins,” it added.
Meanwhile, Zelan’s net cash position and its liquid assets in the form of IJM shares are expected to offer Zelan the financial strength to capitalise on future opportunities.
Valuations-wise, RHB Research said Zelan was still cheaper than the average price earnings ratio (PER) of global peers. Its revised target share price of RM5.10 for Zelan values the builder’s core business at a PER of 18 times FY09 earnings.
Its PER is an estimated 20% discount to the average one-year forward PER of 22 times derived from its global rivals’ valuations. Zelan’s valuations is based on the builder’s relatively small market value and its 82.3 million IJM shares.
According to the research house, Zelan had said it should know, within days, if it was able to clinch a power plant job in Bostwana. This assumes the African nation’s policymakers will finalise the matter at its next meeting.
Zelan had also recently submitted bids for other jobs. These include tenders for the RM1.96 billion Tanjung Jati power plant in central Java, Indonesia and a RM680 million open-cycle gas turbine power plant in Saudi Arabia.
Zelan made a RM142.93 million net profit, or 25.38 sen a share in the year ended March 2008 on a RM1.37 billion revenue. As the company’s financial year has been changed to end in March from January previously, there are no comparative figures available.
Shares of Zelan declined five sen yesterday to finish at RM2.32.
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