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.

Source: www.thestar.com.my

Mudajaya Group Bhd executes letter of acceptance from Mass Rapid Transit Corporation Sdn Bhd for a RM816.24mil contract to undertake part of the Sungai Buloh-Kajang MRT line, project to be completed by February 2016

Mudajaya Group Bhd has executed the letter of acceptance from Mass Rapid Transit Corporation Sdn Bhd for a RM816.24mil contract to undertake part of the Sungai Buloh-Kajang MRT line.

It said on Wednesday the contract was for package V3 involving the construction and completion of viaduct guideway and other associated works from Dataran Sunway station to Section 17.

Mudajaya said the project was expected to be physically completed by February 2016.

"The project is expected to contribute positively towards the earnings and net assets of the group for the current and future financial years," it said.

Source: www.thestar.com.my

Mudajaya is expecting its 26% owned Indian associate company RKM Powergen Private Ltd to be profitable from 2013 after the coal-fired power plant there starts operations, income will be substantial to the bottomline due to secured tariffs - Group MD and CEO Anto Joseph

Mudajaya Group Bhd is expecting its 26% owned Indian associate company RKM Powergen Private Ltd to be profitable from 2013 after the coal-fired power plant there starts operations, said group managing director and chief executive officer Anto Joseph.

“The power plant is under construction and the full completion of the power plant is expected progressively in year 2013. Cashflows will be very positive and this will contribute substantially to the bottomline,” Anto said.

He added that a 20% contribution to its bottomline from this associate company would be possible because the plant was constructed on the build, own and operate (BOO) model, with substantial recurring income from the operations of the power plant.

“The initial power purchase agreements that we have signed is for 20 years but beyond that there will be recurring income for us. The income will be substantial to the bottomline due to the tariffs that we have secured,” he said.

To recap, the company's Indian associate RKM Powergen had recorded a loss of RM12.21mil in the FY2011 ended December 31 because the plant has not started operations. RKM Powergen had recorded profit of RM1.92mil in FY2010, their annual report showed.

“Till you start selling power - you wil find that there is a pre-operating expense. This is why it is showing a loss. Revenue starts coming in only when you start selling power. The previous years, we had surplus cash which we managed to invest while awaiting expenditure. Last year, the money has been invested for activities so there is a pre-operating expense loss,” Anto explained.

Mudajaya expects the power plant to generate a double digit internal rate of return higher than what can be expected in Malaysia on the backdrop of possibly rising interest rates expected in India.

“India is a difficult market but if you can overcome the issues there, then I think the returns are very good. Among the issues: India's currency - the Rupee has dropped quite substantially against the US Dollar. India's coalition government are facing internal issues as well but it should not impact the power sector because it is the main driving force for the economy,” Anto said.

Mudajaya was also aiming to secure additional power plant projects whether through construction or acquisition of power plant assets in India which has a deregulated power industry.

“We are looking at another power plant bigger than this current one. In India there is a supply shortage of power - a brownout situation unlike in Malaysia where we have a surplus (of power supply)). From 2012 - 2017, India aims to build another 75,000 MegaWatts (MW) of power plant,” Anto said.

“For us, (any additional investments) the lenders must be convinced of your balance sheets and it should be healthy enough. For us, in 2013 and 2014 we will have full recognition of the sale of power and we will have surplus cash and we will try to reinvest it to create even more income,” he added.

Meanwhile, the company was eyeing additional power plant, highway construction and water treatment opportunities in India, Vietnam and the Middle East and with bids for an additional RM3.6bil worth of projects aiming to top up its current outstanding orderbook of RM5bil.

Anto said the company was confident of securing about RM500mil to RM1bil of these bids and that a bulk of the bids would come from major local infrastructure projects.

Mudajaya currently derives 60% of revenue from overseas but aims to derive at least 60% to 70% of revenue from overseas recurring income in order not to rely on the cyclical construction sector.

On another matter, Anto said the company could likely be involved with a Chinese based company for the construction of the Prai Combined Cycle Gas Turbine (CCGT) power project.

“We are supporting some of the companies that is bidding for the Prai power - we are supporting for the EPC (engineering, procurement and construction). With the government talking about 4,500 MW of gas fired and another 1,000 MW of coal fire - I think that is good for us because we should get a piece of the action for the construction,” he said.

Source: www.thestar.com.my

No issue of potential coal shortage or squeezed margins, says Mudajaya Managing Director- Anto Joseph

(MUDAJYA opening stock price today (26.4.2012) was RM 2.54)

MUDAJAYA Group Bhd is positive on securing adequate coal supply from Coal India Ltd (CIL) to fuel up its power plants in Chhattisgarh.

"There's no issue of potential coal shortage or squeezed margins," said Mudajaya managing director, Anto Joseph.

Speaking to reporters here yesterday, he said, "The coal linkage with CIL has a guaranteed rate of return because it is structured in such a way that the offtake includes a pass-through cost."

A pass-through cost is charged to the energy supplier, which is then "passed through" directly to the consumer.

"In addition to the coal linkage with CIL, we also have a coal concession 80km away from the power plants with estimated deposit of 100 million tonnes. This is enough to fuel up all four 360-megawatt power plants in the next 15 years," he added.

It was reported that CIL wants to lower the penalty clause in the event of a shortfall in coal supply. The initial promise with new independent power producers (IPPs) was if it failed to supply 80 per cent of contracted volume of coal to power stations, it would have to pay a 10 per cent penalty on the coal cost.

However lately, CIL is pushing the penalty rate to only 0.01 per cent of the coal cost.

Anto acknowledged that Mudajaya's 26 per cent subsidiary, RKM Powergen Pte Ltd, which is the concessionaire of the eventual four power plants, has yet to finalise the fuel supply agreement with CIL.

He said following Indian President Manmohan Singh's issuance of presidential decree to ensure adequate coal supply to the power sector, CIL had agreed to sign fuel supply agreements with IPPs.

"Our subsidiary RKM Powergen is part of the 18-strong IPP lobby group there. The grouping stands by the argument that CIL cannot change the penalty clause unilaterally," Anto said.

"As we negotiate, we'll lobby for the penalty clause to revert to 10 per cent of the coal cost, the quantum that was initially offered to us," he added.

The first of RKM Powergen power plants in Chhattisgarh is scheduled to start operations by the end of this year. The remaining three will go onstream in staggered phases.

On the homefront, Mudajaya is busy executing a RM720 million design and civil works contract for Tenaga Nasional Bhd's new coal-fired plant in Manjung, Perak.

Early this year, Malakoff Corp Bhd awarded Mudajaya a RM1 billion job to carry our civil works on the expansion of the Tanjung Bin power plant in Johor.

Anto said these jobs bumped up Mudajaya's orderbook to RM4 billion.

"We're positive about our earnings outlook as we continue to put in bids for infrastructure works too," he said.

Source: www.btimes.com.my

Recent worries over coal supply agreement for Mudajaya Indian IPP unjustified, full cost pass-through mechanism intact - CIMB Research

CIMB Equities Research said recent worries over the coal supply agreement for Mudajaya's Indian independent power producers (IPP) are unjustified as the fuel supply agreement will be inked soon and the full cost pass-through (FCPT) mechanism is intact.

“We continue to value the stock at a 40% discount to RNAV. We like Mudajaya for its order book replenishment prospects and recurring income from its Indian IPP. Maintain Trading Buy given the likelihood of project wins in the near term,” it said on Monday.

CIMB Research said investors should accumulate on weakness.

It added the share is down 18% from its March 14 high of RM3.20. TRC's CY12-13 price to earnings of 4.0 times to 5.0 times are the cheapest in its construction universe.

Source: www.thestar.com.my