Secures coal supply for India IPP
We expect the overhang on the stock to gradually diminish following yesterday's news that the group, via 26%-associate RKM Powergen, has secured coal supply for its Indian IPP. This is positive news and locks in associate power earnings from 2014 on. Maintain Outperform.
We roll over valuations to end-2014 and apply a higher 15.9x P/E (15.6x previously) in our RNAV valuation, in line with our revised target market P/E. Our target price rises but remains pegged to a 40% RNAV discount. We anticipate a strong re-rating as past delays in the signing of coal supply have been a major investor concern. This news, the signing of coal supply for phase 2 and job wins are catalysts in 2H.
Mudajaya's 26%-owned associate RKM Powergen has signed a coal supply agreement with South Eastern Coalfields Ltd. This is for the supply of coal for phase I (1x360MW) of the 4x360MW coal-fired thermal power plant in Ucchpinda, Chhattisgarh, India. The 20-year supply contract is extendable. RKM will purchase 1.7m MT of coal p.a. from the supplier at US$25/MT. This will be domestic coal (Grade F) with a gross calorific value of 3,300-3600Kcal/kg.
What We Think
This is good news and is in line with management's guided timing for the signing of the coal supply contract. We are positive about the progress made in securing coal supply. This should allay investor concerns triggered by numerous delays in the signing of coal supply since last year. The contract was signed for only unit 1 of the 4x360MW. This means that unit 1 is on target for testing and commissioning by end-2013 and to start selling power by early-2014, in line with our forecast. Indications are that the signing of the coal supply contract for phase 2 (units 2-4, 3x360MW) will be in 2-3 weeks’ time. We expect phase 2 to begin testing and commissioning in 1H14 and start selling power from 2H14 onwards.
What You Should Do
Accumulate. This event and the expected signing of the remaining coal supply agreement in several weeks’ time are likely to re-rate the stock. The constant delays in the signing of the coal supply contract have been a huge share price overhang.
Publish date: 10/9/13