News

• Bags RAPID job. Mudajaya announced that it was awarded a RM489.4m contract from PETRONAS for: (i) the Workers Village and; (ii) temporary construction facilities for the utilities, interconnecting and offsite facilities at RAPID. The entire job is expected to be completed by May 2017 with construction period of 21 months for the Workers Village and 15 months for the temporary construction facilities.

Comments

• Significant contract win… This sizable job win is the first for Mudajaya this year. We estimate that this contract will boost its orderbook from RM962m (estimated as of end 2Q) to RM1.5bn. We are indeed positive on this job win as it provides Mudajaya with the much needed orderbook replenishment. Its newly replenished orderbook would boost its cover ratio (on FY14 construction revenue) from 1.1x to 1.7x, a lauded recovery but still below the industry average of 2.7x nonetheless.

• …but margins still under pressure. Our most immediate concern on Mudajaya remains on its margins. Mudajaya has been in the red for 3 consecutive quarters (i.e. since 4QFY14) due to cost overruns on selected domestic jobs in its orderbook. Until some turnaround signs are witnessed on this front, it is hard to turn bullish on earnings.

• Hopeful in India. We understand that Unit 1 of its Chhattisgarh IPP has achieved physical completion and is now awaiting regulatory approvals to commence operation. While this is good news, we remain prudent and assume that commercial operation for Unit 1 will only begin in 4Q15.

Risks

• Slow orderbook replenishment.
• Further delays in the operation of the Chhattisgarh IPP.

Forecasts

• While this recent job win of RM489.4m has surpassed our FY15 orderbook replenishment target of RM300m, we are in no hurry to raise our earnings forecast as its annual job wins tend to be rather lumpy and inconsistent. There is also downside risk to earnings should the Chhattisgarh IPP fail to commence according to out postulated timeline.
• We continue to project a breakeven year for FY15 which hinges heavily on 2H numbers returning to the black to offset the reds in 1H.

Rating

SELL TP: RM0.99

• While this sizable job win is certainly viewed in positive light, the pressing problems of cost overruns on existing jobs and delays in its Chhattisgarh IPP remains. While there may be a short term share price reprieve, we find it hard to shy away from our SELL rating until some concrete recovery signs come into sight.

Valuation

• TP has been raised from RM0.71 to RM0.99 as we narrow our SOP discount from 50% to 30% in view that its thinning orderbook risk is reducing (although not entirely eliminated) following this recent contract win.

Source: Hong Leong Investment Bank Research - 15 Sep 2015