Unleashing Its True Potential

Unleashing Its True Potential
Macquarie Research Equities 

Event
• We initiate coverage on Zelan Bhd with an Outperform rating and a target price of RM14.00, representing upside of 56%.

Impact
• Zelan ready to take on the world. Exciting times lie ahead for Malaysia's power plant construction specialist, Zelan. Having established a successful track record in Malaysia, the group is moving into the overseas market, which offers lots of opportunity. Zelan proved its competitiveness recently by winning a power plant bid in Indonesia. Its reputation with global equipment manufacturers has also earned it new jobs in the Middle East. Run by an experienced management team, the group is intent on growing the business and, more importantly, is able to execute. Given Zelan's expertise, we are confident that it will obtain more jobs in the future.
• Zelan's target markets represent a US$26bn pa opportunity. Electricity demand continues to be strong in developing Asia. The International Energy Agency (IEA) estimates that to meet their electricity demand, India, Indonesia and the Middle East need to spend about US$26bn pa over the next 25 years on power plant projects. Given this, it is currently a supplier's market, and we believe there will be no shortage of opportunities to explore.
• Construction order book stands at RM3.7bn. Based on this, we expect revenues to more than double YoY in FY08. Management is targeting to raise this order book by another RM3-5bn in 2 years' time. We believe Zelan's order book replenishment targets are achievable given its expertise and the sizable opportunities available in the power sector.
• Potential gain of RM310m if IJM stake is divested. Zelan's 16% stake in IJM will be diluted to about 11% post the IJM-Road Builder merger. As a result, Zelan will no longer be able to equity account for this and we believe there is a possibility that Zelan may sell these shares. Zelan's stake in IJM is worth RM850m (~RM3.00/share) and the group can recognise a gain of RM310m arising from this disposal.

Price Catalyst
• 12-month price target: RM14.00 based on a Sum of Parts methodology.
• Catalyst: Announcement of new projects, sale of IJM stake

Action and recommendation
• Based on its current order book and its potential to obtain more jobs, we forecast Zelan's EPS to grow at 46% CAGR between FY07E-10E. Its ROE of over 20% is also the highest in our Malaysian construction universe. Zelan's PER (ex-cash and IJM stake) of 6.9x in CY08 is undemanding in our view and compares favourably with its regional construction peers. The stock is also a play under our domestic demand/global niche theme (see Hunting Stocks report dated 16 January 2007).