JAKS Resources Bhd (JAKS) is primarily engaged in water supply and infrastructure construction projects, property development in Malaysia, as well as power generation in Vietnam. The completion of the Vietnam Power Plant and the commencement of the commercial operations have started to provide steady recurring income to the company for the next 25 years. We expect JAKS to register core net profit of RM94.6m and RM96.9m for FY21 and FY22 respectively. BUY with a target price of RM0.80 based on SOP (sum of parts) valuations, implying PER of 15.0x and 14.6x for FY21 and FY22 respectively.

The power plant’s concession is owned by a 30:70 JV company (JAKS Hai Duong Power Company Limited) with China Power Engineering Consulting Group Co Ltd (CPECC), comprises of two 600MW coal-fire thermal units with a project cost of US$1.87bn. Under the 25-year power purchase agreement, JAKS Hai Duong will be guaranteed with fixed capacity payments by the Government of Vietnam and backed by energy payment to cover variable costs, including fuel and variable operating costs, and therefore contributing to a sustainable income contribution during the 25 years tenure.

The first unit of the Hai Duong Thermal Power Plant has commenced operation on 24 November 2020 while the second unit in January 2021. In the recent quarter results, JAKS registered a PATMI of RM19.7m for 1QFY21 against a net loss of RM6.2m YoY mainly contributed by the Vietnam power plant. We expect earnings to be stronger in the coming quarters reflecting the full contribution from Vietnam. Based on management’s guidance, the 2x600MW power plant will provide a revenue of US$600m per annum. Assuming a 18% net margin and RM4/USD conversion rate, 30% the JV will generate net income of RM130m per year for JAKS.

Despite strong contribution from Vietnam power plant, operations in Malaysia remain sluggish due to the reimplementation of MCO 3.0 and weak construction sector hence incurring some losses. Nonetheless, we expect JAKS to register net profit of RM94.6m and RM96.9m for FY21 and FY22 respectively thanks to contribution from Vietnam. Going forward, JAKS will continue to expand its business in the power and energy sector in Malaysia and Vietnam.

Source: Rakuten Research - 02 Jun 2021