Results

9MFY12 PATAMI grew by 15% to RM189.9m (34.9 sen/share), making up 96% and 74% of ours and consensus estimates respectively.

Deviations

Deviations due to absence of start-up costs arising from the India power plant which may hit Mudajaya’s earnings (reported under “associate” line).

Dividends

Net dividend of 2.5 sen/share declared (1Q: 4 sen/share), hence bringing YTD payout of 6.5 sen/share. Ex-date on 12 Dec-12, payment date on 11 Jan-13.

Highlights

QoQ Revenue contracted by 37% QoQ due to lower progress for the India EP contract. This is reflected through the lower MI charge of RM5.6m as compared to RM11-15m in the previous quarters. We understand that the EP contract has been 75% completed. However, QoQ earnings only dipped by 9% as operating margins expanded to 19% from 14% in 2Q. 

YoY Although revenue grew by 5% YoY, earnings contracted by 12% due to lower operating margins. This is due to local projects in the construction portfolio which are of lower margins. Hence, bringing down the overall margins. 

9MFY12 Cumulatively earnings still managed 15% growth as 1Q earnings were exceptionally strong, mitigating the flattish 2Q earnings and 3Q earnings contraction. 

India is key Although earnings growth for Mudajaya may have peaked, the completion of the India IPP project remains the key to unlock the company’s valuation. The overall progress for the India venture is 60%, with Phase 1 (360MW) targeted to be completed by 1HCY13 and Phase 2 (1.080MW) by end CY13. We believe that the management has overcome the steep learning curve in India and is progressing steadily to complete the plant. 

Earnings visibility Outstanding order book of ~RM2.5bn  translating to ~2.1x FY11’s construction revenue and ~2.8x order book-to-market cap ratio.

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

Tweaked earnings to defer the startup cost of the India power plant. Hence, FY12 earnings raised by 24%, while FY13-14 earnings cut by 24% and 45% respectively.

Rating

BUY

Positives: (1) Completion of the India IPP project; (2) Resolution of coal supply issue; (3) New project wins. 

Negatives: (1) Delays in completing the India IPP project; (2) Sharp depreciation in the Indian Rupee and US dollar.

Valuation

TP of RM4.27 based on SOP valuation maintained

Source: Hong Leong Investment Bank Research - 22 Nov 2012