Summary

• JAKS Resources Bhd (JAKS) has succeeded in the appeal against the High Court decision to pay damages to Star Media Group Bhd (STAR) in relation to the latter’s corporate guarantee claim. The claim is in relation to the balance purchase price of RM134.5m for the sale of a piece of land in Section 13, Petaling Jaya from STAR to JAKS.

• Recall that STAR filed the suit against JAKS on 30th April 2019, claiming RM134.5m in balance purchase price, along with late payment interest of RM50.5m. JAKS undertook the development of Pacific Star on the land, which includes a 15-storey office block (Tower A), but missed the deadline to deliver the tower to Star Media after a delay of 28 months.

• While there will be no financial impact on JAKS, we view the matter to be favorable to restore JAKS reputation amongst investors after being clouded by uncertainties over the past 2 years amid concern over potential impairments from the aforementioned matter. Moving forward, JAKS will continue to focus on current operations as well as business expansion plans, particularly in the power and renewable energy business segment.

• On the Vietnam power plant operations, the balance RM81.7m EPCC works will be recognised in subsequent quarters, while the local construction orderbook of RM232.6m (as of 1QFY21) will sustain revenue visibility till 2022. Under the prevailing situation, we understand that the construction and property sector is expected to remain beset by temporary halt in work orders until Malaysia’s economic activities gradually return towards pre-Covid levels.

• Still, we expect the Hai Duong power plant to be the main profit driver over the foreseeable future, which will cushion the other segment’s weakness. After a washout year in FY20, we expect JAKS to remain profitable in subsequent quarters.

• On LSS4, construction works is expected to commence in 2022 and expected to be operational by 1Q23. Upon completion, we have penciled mid-high single digit IRR, which will see net margins between 10-15%.

Valuation & Recommendation

• Given the favourable outcome in overturning the High Court decision, we made no changes to our earnings forecast, pending the upcoming quarter results (2Q21) to be release tentatively by end of next month. Therefore, we maintained our BUY recommendation on JAKS, with an unchanged target price of RM0.72.

• Our target price is derived by sum-of-parts (SOP) approach as we ascribed a target PER of 9.0x to both its construction and property development segments, based on their potential earnings contribution in FY22f. Meanwhile, we valued both its concession businesses (thermal power plant and LSS4) on a discounted cash flow approach.

• Risks to our recommendation and target price include lower-than-expected utilisation rate or unexpected increase in overhead cost in Vietnam IPP project. Failure to meet our construction orderbook replenishment assumption of RM100.0m per annum. The Vietnam operations are denominated in USD whereby a firmer USD/MYR movement will be favourable and vice versa.

Source: Mplus Research - 29 Jul 2021