Turning the corner
Mudajaya recently staged a rebound and we believe this is sustainable. We met management and things are looking promising for domestic and regional renewable-energy IPPs, which should transform its earnings profile. We remain bullish on power-plant job wins in 2H.
Our target price is intact at a 40% RNAV discount. The stock’s discount to the sector is unjustified, given a diminishing overhang from coal-supply issues to its India IPP. Its short-term outlook has shifted to potential domestic power-plant job awards. Possible new regional IPP ventures and job wins are catalysts in 2H. Maintain Outperform.
Growth strategies intact
We reviewed the group's domestic and overseas growth strategies during a recent meeting with management. We were positively surprised that things are looking up for the group's attempted venture into new renewable-energy-related IPPs. Success could mean new concessions: smaller, but adding to its Indian power-plant venture (26% stake). Management expects new recurring profit contributions from FY15, which could transform the group's earnings. New IPP concessions offer good growth prospects but construction is still the group's bread-and-butter. Higher-margin projects are in the pipeline, led by domestic power-plant civil work. The group is likely to secure one power-plant contract before end-2013, judging by recent press reports about the rollout of new power plants. A turnaround of its property division is also in store. The group has been working on a potential land-privatisation deal (land swap) which could lead to RM1.5bn of new property GDV.
RM5bn tender book A RM1.8bn outstanding order book is backed by a RM5bn tender book with a 15-20% success rate. Job wins are likely to make a comeback in 2H. A likely gap in profit recognition for new jobs should be filled by new IPP associate profits from India.
Discounts to peers unjustified
Accumulate. The stock’s discounts to peers are unjustified, in our view. Concerns over its India IPP's coal supply should diminish, now that a full FSA has been secured. The stock has staged a rebound and what could fuel a further re-rating is a potential power-plant win in the short term.
1.1 Meeting with management
We reviewed the group's domestic and overseas growth strategies during a recent meeting with management. We were positively surprised that things are looking up for the group's attempted venture into new renewable-energy-related IPPs. Success could mean new concessions: smaller, but adding to its Indian power-plant venture (26% stake). Higher-margin projects are in the pipeline, led by domestic power-plant civil work. The group is likely to secure one power-plant contract before end-2013, judging by recent press reports about the rollout of new power plants. A turnaround of its property division is also in store. The group has been working on a potential land-privatisation deal (land swap) which could lead to RM1.5bn of new property GDV.
2.1 All systems go for India IPP
The cost of coal for the group's 26%-owned IPP in India has been locked in at US$25/tonne. This is local coal supplied by one of the subsidiaries of Coal India. The price is less than half of the international coal price of US$90/tonne, given the coal’s lower calorific value of 3.5k-3.6k vs. 5k-6k for international coal. The supply should ensure that the group's 1,440MW facility (4 x 360MW) gets its 6.8m tonnes of coal p.a. (1.7m x 4 units). Management reiterated that the PPA signed is embedded with a full cost-pass-through mechanism. The power purchase agreement (PPA) was signed much earlier with the state authorities and Power Trading Corp (PTC) at an average Rs2-3/kWh or c.22 sen/kWh. This has upside as power rates have gone up substantially, going by the replacement cost of machines. Testing for unit 1 will commence in Nov 13, with targeted commercial operations by end-2013/early 2014. All four units should be fired up earliest in 3Q14 or end-2014.
2.2 India reopens ultra-mega power-plant bids
A positive surprise was that the Indian authorities recently reopened tenders for ultra-mega power plants, given India's persistent power shortage. We earlier estimated that any such project could be more than double the size of the group's existing 1,440 MW facility and cost RM4bn-5bn. Indications are that RKM Powergen, 26%-owned by Mudajaya, will put in its bid. Potential civil and EP work is likely to be substantial. No timeline has been given but it usually takes 3-6 months for completion of the tender process. This job is not in the group's RM5bn tender book but if secured, could propel the group's order book back to historical highs. Outstanding order book is RM1.8bn, mainly coming from lower-margin MRT jobs as existing higher-margin power-plant civil-work jobs will be depleted in 1H14.
2.3 Going up the value chain: more IPPs
The group continues to pursue domestic and regional IPPs (beyond India). What has changed from nine months ago is that things are looking more promising and the group is targeting smaller renewable-energy IPPs (solar and wind farms, 20-25-year concessions) within the next 6-9 months. These are likely to be greenfield projects with total power output of 10-50MW and potential capex of RM20m-500m. While financial closure has yet to be reached and profit contributions are unlikely to be substantial, we continue to view this strategy positively as it can transform the group from a pure contractor with lumpy earnings to a more diversified contractor. This is similar to the early days of the big contractors like IJM Corp.
2.4 Power-plant construction is coming back
We continue to expect Mudajaya to secure civil-work jobs for upcoming domestic power-plant projects. Management’s optimism on its power-plant tenders during our meeting was reassuring. What is likely to be awarded in the short term is the Manjung Track 3A power-plant extension. We estimate a total civil-work package of up to RM1.3bn, while Mudajaya is likely to secure RM700m-900m worth of jobs. A larger coal-fired power-plant extension will be Track 3B's 2,000MW coal-fired power plant with up to RM2bn worth of civil work available. On the potential power-plant job in Pengerang, we understand that tenders will close on 16 Oct and Mudajaya will submit its proposal. This will be a 1,300MW co-generation gas-fired power plant, with 400MW channelled to the local grid.
2.5 Revamping its property arm
The group's venture with Mulpha to co-develop a 6-acre land in Tropicana is a double positive, in our view. First, it should bring in new construction orders of RM500m-600m as construction will likely be undertaken by Mudajaya, and second, it should bring in an estimated RM720m GDV from four tower blocks/serviced apartments. The group holds a 49% stake in the JV and expects at least 20% gross margins over the next 3-4 years. The project’s first launch has been scheduled for mid-2014. We estimate net-profit contributions of RM18m-20m p.a.
2.6 Potential land swap
We were also pleased that the group's potential land-privatisation/land-swap deal is in an advanced stage. We expect the group to ink an agreement by end- 2013 for the estimated 15-20-acre freehold land parcel in Klang Valley. The deal will involve a land swap, whereby Mudajaya will construct a "government facility" with equivalent value of over RM250m in return for a 221-acre piece of land. Construction will take two years with the land title to be transferred upon completion. The group plans to build a gated residential area with RM1.5bn GDV.
2.7 Kidex could be the next highway
We remain hopeful that tenders for the RM1bn-2bn Kinrara-Damansara Expressway (Kidex) will close in the short term. The tender for Kidex is in a much more advanced stage than that for the other two highways under the 10th Malaysia Plan (10MP) - Suke and Dash. Mudajaya is among the seven bidders (as reported by the press) for Kidex and stands a better chance, we reckon, given its past track record in domestic highway construction. We believe highway projects and timelines will be highlighted during Malaysia’s Budget 2014 on 25 Oct and could feature Kidex as one of the key privatised projects to benefit from the government's traffic-alleviation initiatives.
3. VALUATION AND RECOMMENDATION
3.1 Maintain Outperform; Look beyond the India IPP overhang
Share-price overhangs from coal-supply issues in India are a thing of the past, we believe, now that Mudajaya has fully secured its FSA. We sense that Mudajaya is not too worried about order-book replenishment and will continue to be selective about jobs to avoid margin compression. Upside to construction margins could come from new power-plant projects, while new associate profits from its India IPP should sustain net margins of over 10% beyond FY14. In our view, Mudajaya's discounts to peers are unjustified. It recently staged a rebound and what could fuel its further re-rating, we believe, is a potential power-plant win in the short term. Its RM1.8bn outstanding order book is backed by RM5bn of tenders at a 15-20% success rate. Our target price is intact at a 40% RNAV discount. All in all, its outlook for the next 6-9 months should be positive. Possible new regional IPP ventures and job wins are catalysts in 2H. Maintain Outperform.
Publish date: 08/10/13