• JAKS’s growth trajectory will be supported by the diversification into the long term recurring income from the power generation concession in Vietnam, whilst tapping into the Malaysia’s planned pipe replacement programme nationwide.

• Whilst the concession segment will generate earnings sustainability, the current outstanding orderbook able to provide earnings visibility for the next 12 months with core net profit expected return to the black at RM98.0m in FY21f.

• We assigned a P/E multiple of 9.0x to all but the concession segment that is valued on a discounted cash flow approach, arriving at a fair value of RM0.82.

Key highlights

• Diversification into long-term sustainable income. JAKS has successfully re positioned itself as one of the major players in the power plant industry following the joint-venture (30:70) between JAKS and China Power Engineering Consulting Group Corporation Ltd (CPECC). The agreement consists of the USD1.87bn (RM7.5bn) 25-year Build-Operate-Transfer (BOT) 2x600MW coal-fired power plant project in Hai Duong, northern Vietnam. We reckon that the mid-teens IRR will be a key driver to the turnaround prospects for JAKS.

• Addressing the high Non-Revenue Water in Malaysia. With the national Non Revenue Water (NRW) standing at 36.9% that brings estimated loss of around RM2.0bn per annum, the National Water Services Commission (SPAN) will ensure that water supply operators replace problematic pipes as scheduled to prevent incidents of leaking or burst pipes which cause water supply disruptions to consumers. We believe JAKS will be able to tap into the planned pipe replacement programme that was implemented over three years from 2020 to 2022 in stages involving the replacement of about 150km of distribution pipelines per year and 4,260 connecting pipes.

• Backed by steady orderbook. As at end-2020, JAKS is supported by a handful of local construction contracts with combined outstanding value of approximately RM204.0m. The aforementioned figure represents 0.5x of orderbook-to-cover ratio against estimated FY20 revenue of RM398.9m that may provide earnings visibility till end 2021.

Outlook

• Leveraging on long term sustainable income. JAKS has turned its attention to generate sustainable long term income stream via the diversification into power generation with 30:70 joint venture with China Power Engineering Consulting Group Corporation Ltd (CPECC). Following the recent completion of engineering, procurement and construction of the Hai Duong Build-Operate-Transfer Thermal Power Plant, JAKS has begun commissioning of the first 600MW coal-fired thermal power plant in end-2020. Subsequently in mid-2021, another 600MW coal-fired thermal power plant will come into the picture. At an expected utilisation rate of 85%, the two plants are expected to generate a total of 7.5bn kw/h of net electricity output per annum.

• Sarawak plans to invest RM18.0bn on water supply projects under the 12th Malaysia Plan (12MP). We foresee the Malaysia government placing stronger emphasis on the loss of nationwide NRW. Sarawak has allocated a relatively massive RM18.0bn to facilitate on 4 major water supply schemes over the next 5 years under the 12th Malaysia Plan. At the same time, Suruhanjaya Perkhidmatan Air Negara (SPAN) have approved Air Selangor Sdn Bhd’s business plan, which entails the state-controlled entity undertaking a capital expenditure of RM35.4bn over the next 30 years. We believe JAKS will be able to play its part in Malaysia’s pipe replacement programme, following their proven track record over the years.

• Re-positioning in the local construction space. With the local construction scene was beset with uncertainties post GE-14 as major government-led mega infrastructure projects were being reviewed, we reckon that a revival should take place in 2021 following the higher allocation for development expenditure under Budget 2021. As it is, majority of the mega infrastructure projects remain on the table in bid to spur the economic activities and growth. We understand that JAKS is tendering approximately RM5.8bn inclusive of open tenders from government projects such as Central Spine Highway, civil & engineering works for KVMRT3, packages under Pan Borneo Highway and refurbishing of hospitals.

• Neighborhood mall re-furbishing. As at current juncture, JAKS, aims to refurbish its neighborhood mall; Evolve Concept Mall that sits on a net lettable area of 394,000sqf with tenancy ratio of 81.0%. The refurbishment and re-purposing will cater for new trends and demands in areas such as premium retirement/wellness home, nursery, maternity centre, co- working space and digital economy. Following the disposal of 51.0% equity stake in JAKS Island Circle Sdn Bhd with a net gain of RM71.9m, we note that JAKS will be actively seeking to monetise Evolve Concept Mall should pricing comes in favour.

• Healthy balance sheet. JAKS balance sheet remains relatively healthy in 3QFY20 with a gearing level of 0.4x. Hence, this will provide further leeway for leverage into brownfield acquisitions for solar & hydro projects in Vietnam.

Financials

• JAKS has been delivering a relatively stable financial performance over the years, as growth from overseas venture (EPCC project in Vietnam) was largely offset by the slowdown in local construction activities. With the exception of FY20f that was de railed by the Covid-19 pandemic, we note that core net profit has been relatively stable.

• Moving into FY21f, we expect both top and bottomline to be driven by the new source of concession income from the Vietnam venture with revenue rising 15.1% YoY to RM486.1m. Bottomline is expected to gain further traction (core net profit at RM98.0m, returning to the black after recording core net losses of RM-17.5m in FY20f) owing to the favourable operating conditions such as double digit IRR and tax-free Vietnam venture.

• With the second coal-fired power plant commencing in 2H2021, we reckon the full swing impact to kick in from 2022 onwards. Hence, we have projected both revenue and core net profit rising 53.6% YoY and 38.7% YoY to RM746.4m and RM135.9m respectively.

Valuations

• We derived our fair value of RM0.82 by assigning a P/E multiple of 9.0x to all but the concession segment. The assigned P/E multiple is a discount to the small-mid cap construction sector average due to the slower local construction orderbook replenishment in recent years. Meanwhile, the concession segment is valued on a discounted cash flow approach (key assumptions include an IRR of 14.8%, WACC of 9.0%, terminal growth rate of 2.5%).

• At RM0.685, JAKS is trading at forwards FY21f and FY22f P/E of 12.3x and 8.9x respectively. In the meantime, we also note that JAKS is trading at 1.0x and 0.9x for BV for FY21f and FY22f respectively, implying potential upside in our view.

Investment risks

• Vietnam IPP execution. JAKS financial performance will be skewed towards the dependency Vietnam venture following the relatively massive investment. Should there be a lower-than-expected utilisation rate or unexpected increase in overhead cost, this may impact bottomline margins.

• Dependency of foreign exchange. JAKS is exposed to foreign exchange fluctuation risk, given that both the Vietnam operations are denominated in USD. A firmer USD/MYR movement will be favourable and vice versa.

• Failure to secure anticipated projects. The local construction projects are expected to contribute approximately 30% to the group topline over the next 2 years. We have imputed an orderbook replenishment assumption of RM150.0m per annum. Failure to replenish the depleting local construction orderbook may impact earnings visibility in the construction segment.

Source: Mplus Research - 15 Feb 2021