Jaks Resources (JAKS) is one of the 3 Malaysian companies that were awarded the independent power producer (IPP) contract to build a power plant in Vietnam. The other two are Toyo Ink and Teknik JanaKuasa. As for progress, Jaks is arguably the most advanced as it has secured agreements which include a land-lease deal, a power plant agreement, build-operate transfer (BOT) contract, coal-supply agreement and a government guarantee. More importantly, it has roped in an established power plant builder, China Power Engineering Consulting Group Co Ltd (CPECC) as its equity partner to build a 1200 MW coal-fired power plant in Hai Duong province, Vietnam. The JV company has also secured US$1.4bn (c.RM5.8bn) in financing, or 75% of project costs. Works have commenced in 2QCY16, with the first phase to be completed by 2020. We expect its near term earnings to be underpinned by its Vietnam engineering, procurement and construction (EPC) contract worth RM1.9bn, and other local jobs such as SUKE highway (RM508m), while recurring income to start kicking in by 2020. Our fair value is RM1.50, derived from c.30% discount to our SOTP estimates of RM2.20, or implied c.10x of FY17 EPS. Granted, earnings are bumped up mainly by its high margins EPC contract but we believe the power plant financing structure is essential to ensure healthy cash flow and balance sheet during the construction period. Its net gearing is at 0.8x currently, but should be pared down with the plan to dispose its non-core assets.

• 1200 MW coal fired IPP. Jaks, together with CPECC, is constructing a BOT power plant, with an estimated cost of US$1.87bn with 25 years concession and power purchase agreement with Viet Nam Electricity (EVN). US$1.4bn already secured back in September 2015 from Industrial and Commercial Bank of China, China Construction bank Corporation and Export-Import Bank of China. The JV has US$160m capital (equity portion) and expects the remaining balance of US$307.1m to be injected in the next 3 years. Management expects strong IRR in the mid-teens with the first unit expected to be completed by mid-2020, and the second unit 6 months later.

• c.RM3bn Outstanding Orderbook. Construction earnings visibility is good, underpin by the high-margin EPC contract and local jobs worth c.RM1.2bn. The EPC already started contributing in 2QFY16, with PAT margin of c.20%. We expect the billings to ramp up next year, with another RM1.8bn left to be recognized over the next 4 years.

• Property. Currently, it has only one project i.e. Pacific Star with c.RM130m unsold units and commercial podium and car parks (valued at RM330m). Also, it owns a mall i.e. Evolve Concept Mall (420k sf NLA). We understand property business will take a back seat for now, with plans to dispose the investment assets especially Evolve Concept Mall within the next one year.

Source: PublicInvest Research - 10 Jan 2017