24 July 2012
Summary of Analyst Report: Mudajaya Group Bhd fair value RM 2.88, Neutral - OSK Research
Coal India's (CIL) board meeting to decide on the contentious fuel supply agreements (FSAs) with power companies, initially scheduled for July 10, has been postponed for the fifth time to July 31.
Previously, most power producers were reluctant to agree to the terms proposed by CIL due to the unacceptably low penalty of 0.01% of the shortfall should CIL fail to deliver 80% of the committed quantum.
Following this development, the Prime Minister's office (PMO) had intervened and proposed to raise the penalty to 10% of the shortfall while at the same time reducing the commitment level to 65% of the annual contracted quantity for the first three years and 80% thereafter.
We understand that PMO and CIL are currently negotiating on potential revision of the penalty clause but a decision has yet to be made.
CIL has thus far signed 27 out of the 48 FSAs due this year, as state power ministers have warned that 55 of the 89 thermal plants in India are currently running on low capacity due to fuel shortages.
Despite PMO leading the discussions, we foresee further delays in firming up the FSAs as the final decision would have to take into account CIL's ability to ramp up its production instantly.
This in turn would depend on other factors, such as its existing manpower, issuance of mining approvals from the relevant authorities, as well as potentially increasing coal imports, which would translate into higher electricity tariffs and may in turn spark off unrest among locals.
Experts said these approvals are hard to come by.
CIL now has 102 mining proposals pending clearance at different levels.
Should all these be approved, these projects would contribute over 600 million tonnes of coal vis-vis CIL's 2011 production of 435 million tonnes.
For the FSAs to be finalised, we believe the government of India would have to accelerate the procedures in obtaining approvals to entice CIL to revise the penalty clause.
While we make no changes to our financial year 2012 and financial year 2013 forecasts, we take the opportunity to introduce our financial year 2014 numbers, with our revenue and core earnings forecasts of RM1.29bil and RM342.7mil respectively.
At first glance, this implies negative growth of 34.9% at Mudajaya's topline level, primarily attributed to the expected completion of works on the Chhattisgarh site by financial year 2013.
Its core earnings, on the other hand, is expected to inch up by 3.1% from 2013, thanks to the full-year contribution from RKM Powergen's IPP operations in India, which we expect to bring in some RM95.3mil in financial year 2014.
Overall, the latest developments in India's coal and power industry remain somewhat inconclusive but we see some upside in the potential coal price pooling model as an alternative should domestic coal production fall short, which in our view is more likely than not.
Nonetheless, we continue to take a cautious stance on Mudajaya pending the signing of the FSA between RKM Powergen and CIL.
We believe that this or the official implementation of coal price pooling, could prove crucial in assuaging fears over state electricity boards' reluctance to increase their tariffs, lacking an official directive from PMO.
All in, we maintain our neutraL call for now, at an unchanged fair value of RM2.88, pegged at a 50% discount to our sum-of-parts (SOP) valuation.
The steep discount to the entire SOP value is due to the fact that a sizeable 80% of the group's earnings comes.