1st Dec 2012
But investors are concerned about the status of its Indian power plant
CASH-RICH Mudajaya Group Bhd is seemingly “undervalued” and touted as one of the cheapest construction stocks.
The construction-cum-energy player has been back on the “buy” list of some analysts but is being held down by concerns over the status of its 26% Indian power plant which has been beset by delays.
Trading at a single-digit price-earnings (PE) of 5.2 times, analysts say Mudajaya, with a market capitalisation of over RM1.4bil, is a good buy due to its cheap valuations and a net cash position in its balance sheet. Additionally, Mudajaya has been a dividend-yielding stock.
Despite that, Mudajaya has never attracted much of investor attention even after its management explained its side over the concern surrounding its Indian independent power producer (IPP) project. Mudajaya fell to its three-month low of RM2.54 yesterday. Year-to-date, the counter has added some 15% while the benchmark index has gained more than 5% for the same period.
Chairman Datuk Yusli Mohamed Yusoff says Mudajaya has its merits and is a fundamentally strong company. “It's not huge but I think there's potential for growth but unfortunately the potential doesn't seem to be fully appreciated by the market.”
He says the company has embarked on an investor relations programme to increase awareness to the investing public.
Analysts say Mudajaya's share price performance could be due to continued uncertainty of its Indian power plant project, which in the past weighted down on its share price. The company's earnings have been affected as a result as well.
In 2006, Mudajaya ventured into the Indian power sector by taking a 26% stake in RKM Powergen Pte Ltd via subsidiary Mudajaya Corp Bhd in undertaking a 1,440MW coal-fired IPP project in Chhattisgarh, India. The project comprises four generating units with a nominal capacity of 360MW each.
RKM is one of the IPPs that have yet to ink the fuel-supply agreement (FSA) with Coal India Ltd due to the coal-supply deadlock.
“The project is still on track despite fears of delays but once the Indian power plant goes into full swing, it will be the company's earnings driver, going forward, as sales of electricity will trickle in,” a bank-backed analyst says.
According to analysts, the IPP would be a “turning point” for Mudajaya, as it will lift the company from being a pure construction player to an IPP and provide the company with a stable recurring income rather than its current cyclical revenue from construction.
Earnings from the Indian IPP is estimated to contribute some 20% to Mudajaya's bottom line.
Group managing director and chief executive officer Anto Joseph stresses that there is basically “no issue” with its Indian IPP and the doubts have been overblown.
He adds that the power plant in Chhattisgarh is making significant progress and is expected to be commissioned next July.
“The imminent signing of the Indian IPP's FSA remains a key share price catalyst, along with potential new contracts. Mudajaya remains one of our top picks for the sector. We remain optimistic that the Indian IPP's FSA can be signed on time,” CIMB Research analyst Sharizan Rosely says in a report.
In a report, OSK Research analyst Kong Heng Siong says its checks indicate that the progress of construction at the Chhattisgarh project may have faced more delays due to unfavourable weather as well as labour shortages.
“It appears that the first unit of its 4x360MW power plant will only be completed by end of first quarter 2013, versus the end of the current financial year ending Dec 31, 2012 (FY12) previously, with the remaining three units expected to come on stream on a staggered basis after three months thereafter,” Kong says.
Anto says Mudajaya currently has profits coming from its equipment procurement contract in India. “We will see sales of electricity in the second half of 2013.”
Analysts reckon the company ought to be glad that this matter will soon be resolved and it will be able to generate recurring income from this project. The Indian IPP is tax-free for the first 10 years and is expected to provide Mudajaya with a good income stream.
With RM419.49mil in cash, Mudajaya intends to make a significant purchase in the region, possibly a power plant, to boost its recurring income by becoming an IPP itself.
“We're looking at maybe 50% to 60% of our income to come from recurring income including IPPs, tolled highways and property projects in five to six years,” Anto says.
Mudajaya's revenue, which is now derived mainly from construction, will shift significantly once its recurring income increases. Currently, it has negligible recurring income.
Although the has been some problems with the Indian market, Anto points out that it's a market that cannot be ignored and multinationals companies (MNCs) are still investing in India. He cites the example of the telecommunications sector in India which underwent a series of quandaries recently and yet the same MNCs are still participating in the spectrum auction.
Mudajaya's orderbook stood at RM2.8bil as of Sept 30 that will last the company for the next three to four years. It has tendered for RM5bil worth of projects, mainly targeting the power plants, highways and building.
Analysts are excited about Mudajaya's power plant expansion, which may increase the company's construction order book and provide it with another source of steady earnings when concession profits kick in.
“We believe Mudajaya sees a high IRR (internal rate of return) of mid-teens from its power assets acquisition with the potential of providing long-term recurring income for the group,” an analyst says.
Additionally, the analyst say, there is “little demand risk” as there is power capacity deficit in countries Mudajaya intends to expand into such as India and Indonesia.
Mudajaya has no urgent need to raise fresh funding, given its net cash position, and can expect to soon enjoy a larger stream of recurring income. However, Mudajaya will be going to the bond market next year to further boost its coffer.
Anto says Mudajaya is merely taking advantage of the current low interest rates regime and to prepare itself for any opportunity.
“We just want to prepare ourselves, not that we actually need the money... probably planning to raise RM300mil to RM400mil ... have a war chest should any opportunities come around because in this sort of climate, opportunities will come and by the time we want to go into the market, it'll be difficult.”
The company's capital expenditure (capex) for FY13 will not be significant but is expected to rise in FY14 and FY15 to RM400mil to RM500mil as it takes on more projects. Its current capex is around RM200mil.
Asked if Mudajaya intends to reward shareholders, especially with its huge cash pile, Anto says the company has been paying steady dividends yearly and regularly.
In its third-quarter announcement, Mudajaya declared a second interim single-tier dividend of 12.5% (or 2.5 sen) per ordinary share of 20 sen each.
For the first nine months to Sept 30, Mudajaya posted a higher net profit of RM189.89mil, or 34.86 sen earnings per share, against RM164.5mil, or 30.18 sen per share, in the corresponding period a year ago. As at Sept 30, shareholders funds stood at RM1.09bil and net assets per share at RM2.
Some analysts say the delays at its Chhattisgarh power plant has reduced Mudajaya's margins but Anto is unperturbed. He says its margins are well above the industry's.
“Our pre-tax margin is 15% to 20% while most others are making perhaps 3%. Last quarter, another company with the same turnover as us had a pre-tax profit of RM130,000 whereas we've achieved a pre-tax profit of over RM50mil,” Anto says.
Public Investment Bank says that based on its nine months financial results, Mudajaya's operating margins normalised to 17.7%, which should be the run rate of 16% to 18%, with more local jobs in the order book replacing its Indian engineering and procurement job.
“The margin erosion is within expectations, given the completion of legacy domestic projects. We continue to expect earnings before interest, tax, depreciation and amoritisation margins to stabilise at 17% to 18% beyond FY12, still the highest in the sector. Fourth quarter margins should improve due to the certification of Indian EP (engineering and procurement) works,” OSK Research says.
Alliance Research says Mudajaya fares better on home turf with civil works for the Janamanjung and Tanjung Bin power plant extension running on track.
“Third quarter has yet to see any contribution from the Package V3 of the Mass Rapid Transit (Sungai Buloh-Kajang line). Management guides that works in the Taman Tun Dr Ismail area has commenced and should be reflected in the fourth quarter.
“We understand that Mudajaya is in negotiations with the Government for a building-type job worth more than RM200mil. Under this contract, Mudajaya will be paid via land where it intends to embark on a township development,” Alliance Research says.
Mudajaya has also submitted its pre-qualification tender for the 1,300MW gas-fired plant at the Refinery and Petrochemical Integrated Development in Pengerang, Johor.
With a rosy outlook and more projects to boost, Mudajaya hopes it will be able to attract investor interest. Yusli says Mudajaya would let the numbers speak for themselves.
“The market will decide on what sort of PE (price-earnings ratio) the company's shares will trade at but let's put it this way: there's more upside than downside.
“It (Mudajaya) is trading at a PE of about five times. The industry average PE in our category with our balance sheet and track record should be anywhere in excess of 10. So if it's in excess of 10, then it's 45% upside without any change,” Anto says.
[Source]
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