I've got the power!
Domestic power-plant construction is coming back and Mudajaya is set to emerge as the main winner. Our checks with management reaffirm this view. Investors should revisit this stock as newsflow on power-plant awards could be good in the next 6-12 months.
Our target price is intact at a 40% discount to RNAV. Mudajaya is the dominant local power-plant contractor. Power-plant jobs make up 60% of its tender book. Maintain Outperform with catalysts to come from: 1) one likely power-plant award in 2H13; 2) FSA for its Indian IPP; and 3) regional power deals.
We contacted management recently and were positively surprised that it has turned more upbeat on its prospects. Job flow is expected to be good in the next 6-12 months. The group is looking at RM500m-1bn worth of new jobs in 2H13, backed by RM5bn worth of tenders of which RM3bn (60%) are for power-plant civil work. It is also tendering for a 1,300 MW co-generation power plant in Pengerang, located in Greater Iskandar. For its 26% Indian IPP venture, management noted that the signing of fuel-supply agreements (FSAs, coal) for new-generation IPPs has picked up a few weeks ago. After months of delays, management believes that FSAs appear more likely to be resolved before end-2013. It continues to believe it can start selling power in 1H14.
What We Think
Power-plant construction remains Mudajaya's key expertise. Being the only player actively bidding for power-plant work and having won major power-plant construction jobs in 2011-12, we believe its hit rate will be high. Its past experience of building 16 power plants locally is a plus.
What You Should Do
Accumulate. Interest in smaller caps remains strong and Mudajaya offers attractive domestic exposure. It is cheap against its peers, at 5-7x CY13-14 P/E. Our forecasts are above consensus as we have factored in associate contributions from its Indian IPP, which should chip in full-year profits from FY15, and RM1bn-1.5bn of new jobs p.a. The signing of an Indian IPP FSA by end-2013 should lift the overhang in its share price.
RM5bn tender book, 60% for power plants
The group's outstanding orders are RM2.2bn, made up of power-plant jobs (38%), EP work for its Indian IPP (20%) and MRT projects (36%). The balance is from smaller local projects. Order-book visibility has improved from six months ago and should be anchored by RM500m-1bn of targeted projects over the next 6-9 months. This target is supported by RM5bn of tenders, of which 60% (or RM3bn) is for domestic power-plant-related projects. The balance 20% is for highway jobs, with potential from either the Kinrara Damansara Expressway (Kidex; RM1.5bn-2bn), Damansara Shah Alam Highway (Dash; RM1bn-1.2bn) or Sq. Besi-Ulu Kelang Expressway (Suke; RM1bn-2bn). It appears that its order book is set to recover to historical levels.
Power-plant civil work is coming back
What's more exciting is its power-plant prospects, given a limited supply of local contractors with good track records. Mudajaya is bidding for four power-plant jobs locally and has a strong chance of securing one civil-work job, likely in 4Q13. This is for another 1,000 MW extension of the Manjung coal-fired power plant in Perak. Total development value of RM4.5bn translates to RM1bn-1.3bn worth of potential civil work (20-30% of the total development value). The group has an advantageous position as it is undertaking the first 1,000 MW extension of the same power plant. Other jobs it is tendering for are civil work for the Prai CCGT 1,071MW plant and the 1,300 MW co-generation power plant in Pengerang, which is a positive surprise. One potential large power-plant job is the Energy Commission’s track 3B programme which involves the building of a larger 2,000 MW coal-fired power plant. Total development cost could reach RM10bn, with potential civil work at over RM2bn. Progress of track 3B is expected to pick up in mid-2014 after the award of the project to the winning consortium.
Coal-supply contract for Indian IPP
Management observed that in recent weeks, there has been a revival in the signing of FSAs for incoming IPPs in India. This is a good sign that Coal India, the sole coal producer in the country, will be finalising coal deals with the new power players over the next few months. The terms and agreements in the FSAs are intact and management does not expect any more hold-up in the progress of its 26%-owned coal-fired power plant in Chhattisgarh. The signing of an FSA by end-2013 could mean the testing and commissioning of the first unit for 1,440MW of capacity within 1H14: on time. The subsequent three units should follow suit throughout 2014. A signing of the FSA should lift the overhang in its share price as investors remain wary of further delays in the rollout of the group's maiden Indian IPP venture. Regionally, management continues to pursue smaller-capacity solar, windmill and other opportunities in alternative energy in Indonesia, Myanmar and the Philippines. Progress has not crossed the MOU stage but management remains upbeat on its chances.
Publish date: 02/08/13