Highlights

Physical progress... We had an update on the progress of Mudajaya’s India power plant venture. We are positively surprised by the progress for the power plant whereby major structures i.e. chimney stacks, cooling towers, turbine halls, water transmission pipes, etc are close to being completed.

Next step... Hence, the next step towards completion of the power plant will be the intricate works for the power equipment assembly, control signalling, mechanical and electrical works, and test firing of the power generation units. Currently, the boilers are undergoing testing and commissioning separately.

Inflection soon?... Obstacles faced for such works will be less challenging compared to the physical infrastructure works as it involves more on the intellectual propriety of the engineering design for the power plant. Hence, we believe that the inflection point for Mudajaya will be upon the successful test firing of the power generation units which we estimate will be by 3QFY13.

Value to unlock... Upon successful commissioning of the plant, we believe that value of the India venture will be finally unlocked. Although uncertainty in coal feedstock remains, a newly completed and functional power plant may potentially attract bidders from Government-linked power companies or those with strong political ties in view of the frequent power outages in India. However, we believe that Mudajaya is more likely to reap the rewards of recurring cashflow after overcoming its steep learning curve in India.

RM1.65/share... We believe a base case valuation for the power plant will be its replacement cost. Currently, it costs ~US$1.5m/MW to construct a coal power plant. Hence, this works out to US$2.16bn (US$1.5m x 1,440MW). After deducting INR54.99bn (~US$1bn) in debt papers, the equity value based on Mudajaya’s 26% stake is RM900m or RM1.65/share, which implies a 68% upside from the current share price.

Second in command... Mudajaya has finally appointed a new COO, Mr. James Wong from IJM, which has 21 years of engineering expertise. We are glad with this appointment as it will enable Mr. Anto, MD, to focus more on the business development aspect instead of the daily routine tasks.

Risks

Delay in completing the India IPP project; Regulatory and political risk (both local and abroad); Rising raw material prices; Unexpected downturn in the construction sector; and Sharp depreciation in the Indian Rupee and US dollar.

Forecasts

Unchanged.

Rating

BUY

We reaffirm our view that Mudajaya will be able to successfully commission its India power plant. Meanwhile, the company has strong prospects to clinch civil works for the upcoming 3,000MW coal-fired power plant worth ~RM2.8bn collectively. Hence, we maintain our BUY call.

Valuation

• TP of RM3.53 based on SOP valuation maintained

Source: Hong Leong Investment Bank Research - 03 May 2013