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(CHOIVO CAPITAL) What if you got a 50% discount? (JAKS)
Choivo Capital
Publish date: Thu, 06 Dec 2018, 02:08 PM
For a copy with better formatting, go here.
What if you got a 50% discount (JAKS)
On 21’st August 2018, I wrote an article on JAKS to try and better understand it.
Why Business Sense is not enough (JAKS)
The company was selling at RM0.97 then and have since fallen to RM0.5 or so.
Do note this does not mean I am correct. Price movements mean but little in the short term. Whether or not I am right, depends on whether my thesis then was right. Which will take another 2 years at least.
In the meantime, I’ve spent some time to better understand JAKS, the international and Malaysian IPP markets better, along with firming up my understanding of the contracts involved.
Now, let’s see if JAKS is a good investment at 50% discount.
Overview
Many here are likely to be familiar with this company, as well as a story, but to just refresh, I’ll just pull extracts from KYY’s blog posts.
“JAKS Resources Bhd was awarded the contract to construct two units of 600 megawatts (MW) coal-fired power plant to sell electricity to the Vietnamese Government for a 25-year period in August 2011.
Since the total cost of US$1.87 bil (RM7.76 bil) (based on US$1=RM4.15) is so huge that JAKS could not find any bank to finance the project, the construction of the power plant was postponed several times until JAKS found China Power Engineering Consulting Group Co Ltd (CPECC) to be its joint venture partner in March 2016.
The construction is scheduled to complete in 2020. CPECC is very experienced in conducting survey and designing of power generation and transmission plants. Moreover, CPECC has been playing a leading role in China’s power survey and design industry with about 90% of such work in the country undertaken and completed by the group.
After careful study of the viability of the concession, a consortium of three banks, namely Industrial and Commercial Bank of China, China Construction Bank Corporation and Export-Import Bank of China have expressed preparedness to finance US$1.4 bil (RM5.81 bil) for the entire scheme.
Assurance of project completion
The three Chinese banks accepted the power purchase agreement (PPA) duly signed by the Vietnamese Government as collateral to finance the project. The banks will provide 75% of the funding for the project cost totaling of RM7.76 bil with the balance (25%) to be borne by JAKS and CPECC.
To protect the banks’ interest, the financiers must make sure that the PPA is water-tight and that JAKS and its JV partner must be able to complete the project on time. Both JAKS and CPECC must also be financially sound, otherwise they will not be capable of paying up the remaining 25% of the project cost of RM7.76 bil which amounts to RM1.94 bil.
To ensure that the whole project can be completed satisfactorily, the Chinese JV partner undertakes the full responsibility to complete the construction and operate the power plant for 25 years. JAKS will receive US454.5 mil (RM1.89 bil) during the construction period and 30% share of the independent power producer (IPP) business. The profit of about RM400 mil for JAKS will flow back into the JV company to fund JAKS’ equity portion. In other words, JAKS only needs to fork out RM203mil to own a 30% stake in the power plant. JAKS is also given an option to buy up another 10% of the JV company.
In essence, JAKS is sure to make RM400 mil during the construction period. Upon completion of the power plant project, both JAKS and its partner will enjoy profit every year for 25 years from the sale of electricity to the Vietnamese government.”
Overview of the contract.
Exchange Rate: USD:RM is 1:4.17
Investment in Power Plant: USD 1.87bil (USD:RM is 1:4.17) RM7.8bil
Debt: USD1.4bil (75% of USD 1.87bil) RM5.83bil
Interest Rate: Fixed 6% (Standard Rate given by China and Chinese Banks, except its usually floating)
Concession Period: 25 years
Tax: Zero.
Do note, this is likely to be very rough, as i have close to zero data on the PPA beyond the above.
So, what is the estimated operating earnings of the power plant before tax and Interest expense?
For the sake of simplicity, we're just going to use the EBIT (Earnings before interest and tax)
EVN (Vietnam Electricity) is the largest power producer in Vietnam. They have 25,884MW installed capacity. It’s a mix of difference sources, but coal is the largest.
Its not as precise as one would like, but you do not need to know the weight of a woman to know if she's fat. Its accurate enough to determine if its a good investment. If anyone here can get me the EBIT of a Coal Fired plant, that would be great. Because its not like Power Utilities Companies provide segmental information by power generation type.
EVN, have EBIT of VND27,524,822,000,000. That is RM4.9bil.
Prorated over 25,884MW, and extrapolated to the 1,200MW plant being built by JAKS, we end up with operating profit, before tax and interest expense of RM227mil.
This information is taken from their 2016 financial statements, as the 2017 one is not out yet for some reason.
Now this is just an estimate, what does management say? They never gave any figures or details, but indirectly, from KYY’s blog post we find this.
"It is only good in securing the 1,200 MW coal fired power plant in Vietnam with a very good power purchase agreement (PPA). It will have very good profit every year for 25 years. I understand in the first few years, its annual profit will be Rm 200 to 300 million before interest charges, depreciation etc. Moreover, I understand all the profit from the sale of electricity is tax free."
KYY was once a 30% shareholder of JAKS and I’m going to assume he has at least spoke with management before making that statement.
These estimates are actually lower than my own estimate, which considers depreciation expense.
My Estimate
EBIT: RM227mil
Interest Expense: RM350mil (RM5.83bil X 6%)
Net loss: RM123mil per annum initially
Management/KYY Estimate
EBITDA: RM200mil to Rm300mil
Interest Expense: RM350mil (RM5.83bil X 6%)
Depreciation: RM312mil (RM7.8bil divided over 25 year concession)
Net Loss: RM472mil to RM372mil per annum initially
Now do note this does not take into accounts certain things such as,
- Potential additional capex from transmission lines.
- Potential escalating power rates, which should be higher or equal than the escalating maintenance cost.
- Jaks power plant is as efficient as the average EVN plant from the get go.
- This is a BOT (Build Operate Transfer). How much of the debt can they transfer to the government?
The reality.
Koon Yew Yin made this statement in one of his blog posts
“In my 60 years’ experience in the construction contracting industry, I have never seen such a juicy contract as Jaks’ power plant contract. As an independent power producer selling electricity to the Vietnamese Government at a profitable rate for 25 years.”
I think the reality of the situation is likely to be a little different. Chinese companies are never known for giving the other party a good deal, unless forced to.
My current line of thinking is, JAKS won a PPA contract that they cannot build or finance. Therefore, they sold it to a CPECC for a 30% stake. Which they had to pay RM203mil in cash for, with the balance of RM400m to be covered by the expected construction paper profit.
The banks are willing to loan the money, because in their view, they should be able to get interest serviced for 20 years at minimum. I have no idea how the loan is going to be repaid, given the estimates above, but I’m guessing it can be rolled forward for a long time, or in perpetuity.
It’s a Chinese bank after all, and being essentially part of the Chinese government, profit is not really the number one motive. The real goal is one belt one road, and projects to take up the overcapacity of state owned companies in China.
CPECC is willing to do it (other than because it’s essentially part of the Chinese government), is because of the banks funding and taking most of the risk.
They get to build that project, and have their staff run the plant for 25 years. Putting some of that overcapacity to work.
Despite the expected losses, they may be allowed to still pay dividends. Over 25 years, they may potentially recoup their equity stake and more.
As this a BOT, if they can transfer the debt. We can forget about the debt, compound the interest and just throw it to the Vietnamese government to figure out at the end of the 25 years. But i doubt they will allow this.
But if the interest needs to be paid yearly, I would have no idea how the company will be able to pay dividends.
Now, on that line of thinking, it sounds like the kind of contract a China company would give you. It’s a very very hard line.
Except.... If one were to use my estimates and not KYY's.
Best Case Scenario
Now, lets play with the mathematics for this. Using the best case scenario, which is my estimate, which is roughly RM350mil higher than management's or KYY's. We get this.
EBIT: RM227mil
Depreciation: RM312mil
Therefore,
EBITDA: RM539mil
Interest Expense: RM350mil (initial figure, reducing balance)
A minimum of RM457,503,094.46 needs to be paid every year for 25 years in order for the debt to be repaid.
This gives about RM82,846,817 worth of dividends payable each year to the shareholders. Discounted at 5%.
The entire thing is worth RM1.2bil. With Jaks portion of 30% being worth RM360mil.
Far below the RM603mil (cash plus paper construction profit). But RM157m higher than cash paid.
IRR on the cash paid of RM203mil is about 11.42%.
Do note this is the absolute best case. Its RM312m in cash higher each year than the figure given by KYY.
Conclusion
At the current price of RM0.5 per share, the market capitalization of JAKS is RM278m.
The company has equity of about RM843m. Removing out the investment in JV, the property and construction division has equity of about RM652m
As it does not have any significant hidden assets such as large pieces of land held at extremely old valuations. We can take this as the RNAV.
The prop dev and construction company are selling for 42% of RNAV. And in exchange for paying this price for a prop dev and construction company that has
- A mediocre track record
- Bad capital structure, high debts with current liability exceeding current assets.
- Outstanding legal issues along with looming LAD charges
- Potential cash calls and right issues.
And most importantly, your opportunity cost, considering the sheer amount of opportunities available in KLSE now, whether in property development, trading, export etc etc
You will be getting a flyer on a stake of a power plant in Vietnam that will in our best case scenario, using earning estimates RM350m higher than management, that is worth RM360mil if discounted at 5%.
Is it worth it?
Well, if management made a mistake, and they meant the figures shown above. Then its a yes.
But i dont think so. No idea, unless they give verbal confirmation or we see a copy of the PPA.
As always if you feel I made an error, or have a very different perspective, Let me know.
Disclaimers: Refer here.
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Discussions
2 people like this. Showing 50 of 161 comments
Oh ya Sarifah kan ada Sslee d shareholder activist sbg teman in tis Andy
As we talk Sslee is crunching d figures always cari bukti
Keep it up Sslee
2018-12-07 09:10
to the psycho sslee
you lost money on Jaks, none of my business
Go and jump if u want.
2018-12-07 09:25
sslee,
I am just basing off my own guess.
Or KYY figure.
Which if you want, try and twist it into postive (zero debt plus say 5%% irr).
The amount of rake hikes needed is intersting.
2018-12-07 09:43
Yes, i dont have the PPA.
So i have to make my best estimate.
===
godhand the way u written how they handle debt is purely assumption.
07/12/2018 09:13
2018-12-07 09:43
choi....projecting IPP profits....
http://aglblog.com.au/wp-content/uploads/2013/09/No.38-Normal-Profit.pdf
I don't even understand it nor have any intention....
2018-12-07 10:28
lurker
now it is 50 sen
everybody very smart in writing eulogy
to me....those didn't sell above 70, too late to sell
those bot recently,, look to sell around 70.
others may want to keep and fight....well, its a huge IPP, 30% of 1.2 GW is a big deal for tiny little Jaks. Market cap $ 400M......It offers huge gearing effect for shareholders of Jaks. Its a US$ 2 billion project. If it works out, rewards are tremendous.
yes, immediate horizon, there will be cashflow problems for Jaks but gearing of .25X is manageable, back to the drawing board for them.......u weight that against potential reward from balance of EPCC profits about $ 250 million, ....with NTA $ 1.50 and .25 X gearing, eulogy is too early.
at 50 sen...eulogy ? what is the point?
buying the warrants at 25 sen? don't be silly when u can buy the shares at 50 sen......
2018-12-07 10:42
Rubbish article. trying to manipulate market sentiment. borderline criminal.
2018-12-07 11:07
lurk
if Jaks cannot solve its cash flow problems it may have to give up some or all of this Vietnam plant to the Chinese...the minimum price would be its cost....and still the NTA is $ 1.50......
management will need to work hard...
2018-12-07 12:38
there are ways to solve cash flow problems....1. clearly there will be people who are willing to buy some or all of its stakes in the Vietnam plant....Koreans, Japanese and Europeans are still bidding for Vietnam plants.....
2018-12-07 12:41
by i3lurker > Dec 7, 2018 11:13 AM | Report Abuse
qqq3,
for traders and gamblers it would be worth a punt soon enough. Coming very soon.
=========
no way la....
to me....there is little risk at 50 sen....its not like market just beginning to fall....
and yes.....recency bias......if one can fight recency bias, one already is an above average trader......
2018-12-07 12:44
no rights issue....I guarantee u....
They will have to dispose assets...including some or all of its stake Vietnam plant if terms are acceptable...actually, not bad one.....if they can arrange a sale but keep the EPCC profits which have been agreed upon...about $ 250 million remains....This share can still fly if they strike the right deal.
2018-12-07 12:51
i3lurker > Dec 7, 2018 01:02 PM | Report Abuse
my personal opinion is that the Directors will prefer to destroy Jaks rather than sell off the Vietnam IPP.
=========
crazy talk.
2018-12-07 13:08
Posted by i3lurker > Dec 7, 2018 01:21 PM | Report Abuse
PN17 coming if no action taken, Chinese like this very much.
========
crazy talk....with so much assets,, where got PN 17....?
huge positive current ratio, huge assets....where got PN17?....what concerns Jaks is not creditors/ bankers liabilities....but its own commitment for Vietnam venture.
Material Commitment
Save as disclosed below, there are no material commitments incurred or known to be
incurred by the Group that has not been provided for, which upon becoming
enforceable, may have a material impact on the financial results/position of the
Group:-
There is capital contribution contracted but not provided for in respect of shares
subscription in the joint venture, JAKS Pacific Power Limited, amounting to
approximately USD110.14 million or * RM456 million, using exchange rate of
USD1 : RM4.1405 as at 28 September 2018.
* about 30% is cash commitment, rest being EPCC profits
2018-12-07 14:38
this young man choi worried IPP lose money....
corporate finance is worried how to complete the deal.....
u see...huge difference between book man and practical men.....
2018-12-07 14:56
this young man choi worried IPP lose money....
corporate finance is worried how to complete the deal.....
u see...huge difference between book man and practical men.....
actually not true....previously I just keep quiet.....but even old man sifu that KC from NZ missed the main point in all his writings about Jaks......
actually old man KC not any smarter not any better than young man choi.
2018-12-07 15:00
by my calculation it works.
By kyy's it don't unless, we have rate hikes of like 3% per annum.
2018-12-07 15:00
d by qqq3 > Dec 7, 2018 12:51 PM | Report Abuse X
no rights issue....I guarantee u....
They will have to dispose assets...including some or all of its stake Vietnam plant if terms are acceptable...actually, not bad one.....if they can arrange a sale but keep the EPCC profits which have been agreed upon...about $ 250 million remains....This share can still fly if they strike the right deal.
2018-12-07 15:03
lurker
now it is 50 sen
everybody very smart in writing eulogy
to me....those didn't sell above 70, too late to sell
those bot recently,, look to sell around 70.
others may want to keep and fight....well, its a huge IPP, 30% of 1.2 GW is a big deal for tiny little Jaks. Market cap $ 400M......It offers huge gearing effect for shareholders of Jaks. Its a US$ 2 billion project. If it works out, rewards are tremendous.
yes, immediate horizon, there will be cashflow problems for Jaks but gearing of .25X is manageable, back to the drawing board for them.......u weight that against potential reward from balance of EPCC profits about $ 250 million, ....with NTA $ 1.50 and .25 X gearing, eulogy is too early.
at 50 sen...eulogy ? what is the point?
buying the warrants at 25 sen? don't be silly when u can buy the shares at 50 sen......
2018-12-07 16:03
Posted by qqq3 > Dec 7, 2018 03:00 PM | Report Abuse
this young man choi worried IPP lose money....
corporate finance is worried how to complete the deal.....
u see...huge difference between book man and practical men.....
actually not true....previously I just keep quiet.....but even old man sifu that KC from NZ missed the main point in all his writings about Jaks......
actually old man KC not any smarter not any better than young man choi.
Old man KC? All of us grow old. And I don't think you are younger than me.
You kept quiet? It is because you don't know much about Jaks power plan, besides shouting sailang and margin from RM150+.
I missed the main point? What point. You don't even have the faintest idea what the main point is to invest in Jaks.
How are you t compare with me? You are just thousands light years behind.
How are you comapred with Choivo?
You can't even smell his fart, although you are 40 years older and a self-claimed "accountant". Serious, you are thousand miles behind him in knowledge, experience and in humility.
2018-12-07 16:15
If not sure, don't buy.
But im a stupider version of him. So i still studying. If drop more, 1% position can lah. See what happen from there.
on the other hand, got so many other things. Really no idea ler.
This money im not sure if its for me to make or lose.
===
Posted by Icon8888 > Dec 7, 2018 04:03 PM | Report Abuse
Jon, what does warren Buffett say now ? Buy or not buy ?
2018-12-07 16:17
coal demand already shortage in vietnam and causing coal thermal power plant supply of electricity power cut...do you still think coal thermal power plant profitable in long run? or vietnam government invest in solar, wind and LNG power plant to replace coal thermla power plant?
2018-12-07 16:21
Posted by qqq3 > Dec 6, 2018 11:23 PM | Report Abuse
so are u going to write an apology or not? better still with revisions and new thread.
Jon was trying hard to write something to share for those who owns Jaks or contemplating to buy Jaks.
Apology? For what?
You should be the one profusely apologize now as you have led many people lost a fortune shouting margin and sailang when Jaks was trading at RM1.50+.
2018-12-07 16:24
kc...why all air only but no substance....? be like me lah...talk with substance one.....
2018-12-07 16:26
Posted by qqq3 > Dec 7, 2018 04:26 PM | Report Abuse
kc...why all air only but no substance....? be like me lah...talk with substance one.....
KC no substance and qqq3 got substance.
I give you a suggestion. Get your analyst son to read all my articles on Jaks and your articles on Jaks. Then ask him who got substance.
A good test on whether his "accountant" dad really got any substance in finance and investment, and how is he compared with an engineer.
2018-12-07 16:30
my son? don't involve him...no need.....anyway , have not met an analysts which is my equal...except Tong of Edge....
2018-12-07 16:39
Posted by qqq3 > Dec 7, 2018 04:35 PM | Report Abuse
my son? don't involve him...no need...He is on holiday in Bangkok....anyway , have not met an analysts which is my equal...except Tong of Edge....
Oh My God!!!!
Well, I think I better just totally ignore you. It just a plain waste of time. You are from another Planet, But before I do that, I just borrow what somewhat who had met you and knows you very well as below,
"Dear fake accountant qqq3,
I am very mean and cruel to you in order to be kind to all the i3 community by exposing you for what you are. You are a fake accountant, a fraudster, a backstabber, a bootlicker, an ass-kisser, a shameless manipulator and good for nothing low life parasite feeding newbie and even super-investor Mr. Koon with manipulated information for you owe self benefit.
By exposing you and hitting at your conscience, I am trying to save the i3 community from your bad influence/evil and if possible save your soul/conscience too if you still have one inside you. Now I can say for sure your soul/conscience is beyond saving.
Can you now please prove to i3 you are a real accountant and tell us when you met Mr. Koon and for what purpose? I shall rest my case."
2018-12-07 16:46
kc...
actually your performance worse than young man choi....
Young man trying to prove viability of the ipp by extrapolate here extrapolate there...U trying to calculate IRR in vacuum.....How is more silly?
corporate finance is worried how to complete the deal..... refer to capital commitment for the project...
u see...huge difference between book man and practical men....
2018-12-07 16:46
kc...
actually your performance worse than young man choi....
Young man trying to prove viability of the ipp by extrapolate here extrapolate there...U trying to calculate IRR in vacuum.....Who is more silly?
corporate finance is worried how to complete the deal..... refer to capital commitment for the project...
u see...huge difference between book man and practical men....
2018-12-07 16:47
Posted by i3lurker > Dec 7, 2018 01:21 PM | Report Abuse
PN17 coming if no action taken, Chinese like this very much.
========
crazy talk....with so much assets,, where got PN 17....?
huge positive current ratio, huge assets....where got PN17?....what concerns Jaks is not creditors/ bankers liabilities....but its own commitment for Vietnam venture.
Material Commitment
Save as disclosed below, there are no material commitments incurred or known to be
incurred by the Group that has not been provided for, which upon becoming
enforceable, may have a material impact on the financial results/position of the
Group:-
There is capital contribution contracted but not provided for in respect of shares
subscription in the joint venture, JAKS Pacific Power Limited, amounting to
approximately USD110.14 million or * RM456 million, using exchange rate of
USD1 : RM4.1405 as at 28 September 2018.
* about 30% is cash commitment, rest being EPCC profits
2018-12-07 16:48
qqq3 > Dec 7, 2018 03:03 PM | Report Abuse X
d by qqq3 > Dec 7, 2018 12:51 PM | Report Abuse X
no rights issue....I guarantee u....
They will have to dispose assets...including some or all of its stake Vietnam plant if terms are acceptable...actually, not bad one.....if they can arrange a sale but keep the EPCC profits which have been agreed upon...about $ 250 million remains....This share can still fly if they strike the right deal.
2018-12-07 16:49
Fake accountant.
Do you know that when share market not doing well like in 1997/98, the very first thing the broker house did was to dismantle the Research Department.
Your son's job is at risk now.
Donald Duck tsunami is coming wave after wave...........
2018-12-07 16:51
ks...let him worry about it when time comes...not like u , cross road also worry sick.....
2018-12-07 16:54
kcchongnz > Dec 7, 2018 04:46 PM | Report Abuse
I just borrow what somewhat who had met you and knows you very well as below,
=======
met me? no no no...Never met that psycho and OCD patient SS Lee.
2018-12-07 16:58
Yes...fly awhile for special dividend declare from disposal of asset then going down...then park low lorh
2018-12-07 16:59
ks...fake accountant can talk strategic issues, capital commitments, and accountant terms very good already......
u? what u good for?
2018-12-07 17:05
ks...I really don't care if u are rich like Warren Bufalo......but fake accountant can talk strategic issues, capital commitments, and accountant terms very good already......
2018-12-07 17:10
Can you sleep tonight?
DJ going to sink again tonight just like yesterday, and Tuesday.
2018-12-07 17:12
me? I could have sold off my trading positions at almost breakeven .....but I choose to fight...At the top, it is good to react fast...at current levels, often react too fast is a mistake.....
2018-12-07 17:34
JON bro,
Why not trying to shake some light out for PADINI ...
Be it FA or TA , i'm sure PADINI worth to for discussion.
i'm looking forward for somewhere at 3.00 or below .
WHAT SAY U ?
2018-12-07 17:47
Venfx, padini have some very interesting moats. I had once worked with them.
But it has always been too expensive for me. Haha. Maybe now, can see again.
2018-12-07 18:27
My personal investment principles are simple and very sound based on which I had managed to avoid many pitfalls and financial losses :
Avoid those with
1) complicated business models
2) poor financials especially companies with high gearings
3) businesses relying on projects/contracts with LONG GESTATION PERIODS
during which many unforeseen and serious business/economic/financial
problems/uncertainties can arise.
Item (3) above is relevant for JAKS
2018-12-08 00:33
well, whether it be 50% discount or etc, things can go very wrong if co. keep diluting shares. No ending one.
2018-12-08 09:14
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So Ah Jon's revised calculations: Neither a juicy deal nor a Holland deal?
"In my 60 years’ experience in the construction contracting industry, I have never seen such a juicy contract as Jaks’ power plant contract. As an independent power producer selling electricity to the Vietnamese Government at a profitable rate for 25 years.”
Just a better deal than FD??
"You will be getting a flyer on a stake of a power plant in Vietnam that will in our best case scenario, using earning estimates RM350m higher than management, that is worth RM360mil if discounted at 5%."
2018-12-07 08:58