Short answer, most likely no.

Summary of Gunung

Price has shot up recently and caught my attention, so i did some quick check on it. Here's some quick summary:

1. Involved mainly in transportation biz, e.g. ferrying participants for National Service and other government related stuffs, like our armies

2. Major shareholders are politically connected

3. Main biz is suffering especially since NS has been deferred (that's why the losses)

4. The main talking point about Gunung now is for their entry into mini hydro power plants. They ventured into it few years back, first 14MW plant about to commence operations based on the prospects commentary in quarterly report

So what's so special about Gunung

What has caught investors' imagination is the company mentioned that they have total 140MW capacity for hydro projects which is very sizeable for a RM100m market cap company. 140MW could potentially generate RM300m revenue, if 10% profit RM30m, PE 3 times, wow!

Hold your breath.

When things sound too good to be true, they often are. So I try to trace back what has happened in this company over the years and one big fact automatically invalidate my previous paragraph.

Effective MW is much lesser

140MW is misleading. Most of the plants were owned by Gunung through a 30% JV via its 60% indirectly owned subsidiary via a 85% owned subsidiary so effective stakes mostly around 15.3% only. A quick calculation, total capacity is 144.7MW, but Gunung's effective stake is around 38.7MW.

if we assume 24/7 operations with no wastage, 38.7MW x 24 hours x 365 days x blended 25c tariff = RM85m revenue when all fully completed and running.

I'm not very sure about margins for this kind of mini-hydro plants, but I suppose these utilities biz generally will generate good EBITDA but net profit will be eroded by depreciation and interest expenses (all these won't show in Gunung's P/L because the stakes do not qualify for consolidation). So margins are unlikely to be fantastic, but let's just simulate different scenarios.

If all plants fully completed and running efficiently with decent margins (>10%) then the current price won't be excessive (PE 11-17 times, a bit on the high side for a small cap but acceptable for utilities biz), however currently management only indicate that one 14MW plant will commence soon (effective stake 2.14MW) while others are still work in progress. If we only take that single plant, then current market price is giving PE of >200 times. Which means market seems to have priced in a few years ahead, which in my view is risky considering that we don't know exactly when these plants will be coming online and their profitability.

Upside/downside risk to my calculations

Upside:

i) Higher than expected margins

ii) Few more plants yet to get PPA

iii) Possibility of acquiring bigger stakes in those plants (if price is right)

iv) New contracts for its transportation biz

Downside:

i) Core operations still struggling, so losses will offset utilities contribution ( I didn't take into account the current core biz)

ii) Delays in the building of hydro plant

iii) Lack of control over these JVs may mean that operations or costs may be out of company's control

iv) Learning curve in terms of propert maintenance and upkeep of these plants (in my illustration, I also assume 24/7 full year round which is not possible for maintenance)

Conclusion