• We are maintaining our BUY call on Jaks Resources (JAKS) with a RNAVbased TP of RM0.61, as we believe the issuance of the rights share will help ease the cash flow constraint over the next 12-18 months. 
• The recent disposal of its property development arm also reduces JAKS’ liability as it no longer carries the LAD liability. 
• Although we are not optimistic on JAKS’ chances of winning a bid (50 MW) in LSS4, it would be an incremental positive if it’s successful.

Current Funding Is Sufficient to Complete the Vietnam Power Plant

Most of the funding from the current rights issuance of RM200m-RM284m will be used for JAKS’ equity subscription of US$30m (RM128m) in its Vietnam power plant venture, which is expected to be fully completed and operational by mid-2021. Post the issuance, JAKS would still need around US$7.14m to fulfil its capital commitment for the power plant, which will be funded largely by the remaining profits of its EPCC contract for the power plant. As such, we believe that it is very unlikely for JAKS to raise additional capital for the power plant project, unless JAKS wants to take up an option to increase its stake by a further 10%.

Not Expecting Any New Fund Raising for the Next 12-18 Months

Apart from the Vietnam power plant project, most of the remaining funds will be used to either meet working capital needs, future business projects, or the partial repayment of its current borrowings. We believe that the balance of the funds is sufficient to keep JAKS afloat at least the next 12-18 months, despite it operating at a negative operating cash flow position, as it has already disposed its property development arm which had been a drag on its cash flow. Apart from that, JAKS has a liability (LAD) of RM165m on its books, related to the late completion of the Pacific Star project, which will be due once the project is completed by the end of 2020.

Reiterate BUY With Lower 12-month TP of RM0.61

Although JAKS has submitted a bid for 50MW in the LSS4 tender, we have not factored this into our valuation, as we think there is only a slim possibility of success. We have revised our RNAV-based TP to RM0.61, as we have factored in the current share dilution from the rights shares, but lowered the holding company discount as the risk of further equity fundraising is low in the next 12-18 months. Reiterate BUY.

Source: Affin Hwang Research - 5 Nov 2020