News

Mudajaya in Memorandum of Agreement with PT Indomuda Satria Internusa to acquire 70% stake in PT Harmoni Energy Indonesia (PT HEI) for US$5.8m (RM18.5m).

PT HEI is a SPV which has entered into a Power Purchse Agreement (PPA) with PT PLN (Persero) Wilayah Sulawesi Selatan, Sulawesi Tenggara and Sulawesi Barat for the development of 2x7 MW coal-fired power plant on Build- Operate-Transfer for 25 years in Desa Baruta Analalaki, Sulawesi, Indonesia. Tariff rates for year 1-8 is US$0.118487/kWh (RM0.385083/ kWh) and year 9-25 is US$0.09384/ kWh (RM0.30498/ kWh).

PT HEI is currently constructing the project and the commercial operation date is by end 2014. It has secured a coal supply agreement for the duration of the PPA where the qualtity and pricing of the coal have been finalized and agreed.

Financial impact

Based on the power plant capacity and tariff rates as well as assuming 70% availability, 15% margin, DCF at 12%, this venture would yield US$7.74m vis-à-vis investment cost of US$5.80m.

At exchange rate of RM3.30/US$ and assuming 4% opportunity cost (to finance the acquisition), this translate into value add of RM5.63m or 1.02 sen per share.

Pros / Cons

Overall investment cost and impact is minimal. However, it will provide some earnings diversification and further enhance its reputation as a construction company with niche in the power sector as well as power assets owner.

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.

Forecasts

Unchanged.

Rating

BUY 

Although Mudajaya lacks new contract wins and order book replenishment has been a growing concern, the company’s prospects in securing power-related civil works for Janamanjung and Project 3B (assuming 1MDB wins) remains strong. The other strong catalyst would be the successful test firing of its India IPP. We are reiterating our BUY call on Mudajaya as we believe that the company is able to successfully replenish its order book and commission the India power plant.

Valuation

TP of RM3.53 based on SOP valuation maintained (see Figure #1).

Source: Hong Leong Investment Bank Research - 6 May 2014