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Mudajaya Group Berhad (5085) -Is There Leg To The Recent Rally?

Over the course of the year, its share has been beaten down heavily, tumbled from a 1-year high of RM1.470 per share in Jan-16 to 1-year low of RM0.725 per share in end-Nov 16. As a construction company, this looks  contradictory given most construction stocks have had a good run this year. However, just recently, the share price has rebounded sharply from the low and ended at a price of RM0.94 per share last Friday. This translated into approximately 30% return in just one month time! So what’s going on?

Chart 1: Share Price Movements For Mudajaya Over The Year

What’s Happening?

Before we dig deeper into reason behind the recent rally, let’s take a look at what has caused the share fallen so much this year. In our opinion, the huge losses incurred over the past 2 quarters and jittery on its upcoming due of the current liabilities played a big part of it. Taking a closer look at the latest quarterly result ended 30 Sep 2016, the management team has highlighted 2 major reasons: 1)poor cost management on its construction projects has resulted in operating losses for the segment despite a huge jump in revenue and 2) equity accounting of losses from associates in India (company which operates the power plant) as well as impairment of the Philippines wind farm related investment.

For the former, not much details have been provided (eg. high foreign labor cost, penalty because of delay etc), hence it is hard to know whether it is going to be a one-off  event or otherwise. As for the latter, the impairment of the Philippines wind farm related investment means that this investment has most likely failed and will not be able to generate earnings in the future (it has never generated any earnings yet as it is still in its construction stage), but one thing to note is that this is a mark to market losses with no impact on actual cash flow hence funding.

Similarly, equity accounting of losses from associates in India is also a form of non-cash expense, reflecting the estimated depreciation of unit 1 & 2 and interest expense that could not be capitalized after commercial operation date (COD) set by the government. The COD is defined as the date after which all testing and commissioning has been completed and is the initiation date to which the seller can start producing electricity for sale (i.e. when the project has been substantially completed).

Furthermore, there are also lingering uncertainties on the repayment of RM240 million of MTNs due on 23 January 2017 and the Group’s weak YTD Sep 2016 performance as highlighted by the RAM Ratings. This is reflected via its staggering high level of current liabilities.

Is it all doom and gloom for Mudajaya then?

If all of these looks so gloomy for Mudajaya, investors might be scratching their head why is there a rally in the share price lately? Heres are something that the existing shareholders should be cheerful about:

1) Indian associates: While we are not too sure whether these expenses (depreciation and interest) will persist moving forward, the good news is that the long waited power plant can start to contribute positively to the revenue of the company as a 25-year power purchase agreement for its Unit 1has been signed in March 16.  The negotiation for the PPA for Unit 2 was in progress and was expected to be concluded soon. There is also rumour on the sales of the 26% stake in this Indian associates once the construction for power plant completed, which could be a boon to share price as the market has been quite pessimistic on this venture.

2) Concern on debt repayment: Mudajaya had recently entered into a subscription agreement with Sun Hung Kai Investment Services Limited (SHK) to underwrite the proposed issuance of US$60 million of MTNs (Series 1) under the Group’s US$200 million Euro MTN programme (EMTN). Series 1 is expected to be issued by end-December 2016, and a part of the proceeds will be used to facilitate the redemption of the RM240 million of MTNs due in January. Besides that, Mudajaya Corporation Berhad (“MCB”), a wholly-owned subsidiary of Mudajaya Group Berhad has also secured a term loan facility of USD50 million (equivalent to approximately RM223.8 million) from United Overseas Bank (Malaysia) Bhd for general corporate purposes including the redemption of Sukuk Programme. These new fundings should be sufficient to cover most of the debt repayment in the near term.

3) New contracts bagged: Mudajaya Corporation Berhad has won 3 large scale contracts in just 1 month time- (1) the development of a Large Scale Solar PV Plant (LSSPV) of 49.00 MWa.c. on Build-Own-Operate basis at Sungai Siput, Kuala Kangsar, Perak with a contract value of RM270 million over the span of 18 months, (2) construction and completion of viaduct guideway and other associated works from Universiti Putra Malaysia to Taman Pinggiran Putra in Putrajaya (KVMRT Package V207)with a contract value of RM560 million over the span of 56 months and (3)the construction and completion of Package 2 (Ayer Itam to Lebuhraya Tun Dr. Lim Chong Eu By-Pass) of Penang Major Roads and Third Link Project in the State of Penang with a contract value of RM810 million over the span of 36 months. These contracts in total sum up to RM1.6 bil, which is a huge amount for a company with a market capitalization of RM507 million. These contracts will be a boost to the revenue, and perhaps earnings of the company in the coming year if it improves its cost control moving forward.

Table 1: Estimated Profit For New Projects Bagged

Takeaway

While there are still many uncertainties for Mudajaya ahead, the situation is looking slightly more positive now with some encouraging developments in the recent months.  Considering the share price has fallen so much over the course of the year on the pessimistic view on the company, we believe the possibility of a turnaround in earnings (the odd is higher now with new catalyst) could be underpriced and may fuel a sharp rally if this materializes. That said, this is a high-risk high reward trade which is only suitable for those investors who have a big risk appetite.

Disclaimer: The views above are opinions based on facts and subjective judgements. We do not take any responsibility for any actions rely on the information discussed. The author does not own any shares of this company at the time of writing.