Mudajaya’s earnings recovery  has been  deferred  by a  year  due to  yet another  delay  in  its  Indian  power plant  project.  Also not helping is  the lack  of major contract wins  YTD. We believe  the market  may  re-rate the stock when it becomes clear that its Indian power plant will soon be upand-running.  As a result, we cut our FY14/15 forecasts by 65%/31% and FV by 5% to MYR2.71 (from MYR2.85), but maintain our NEUTRAL call.
Indian  power  plant  delayed  by  six  more  months.  We  project Mudajaya’s  earnings  recovery  to  be  delayed  by  a  year  to  FY15  from FY14. This follows the  commercial operation date (COD)  deferment  for Unit 1 of its 4 x 360  megawatt (MW)  greenfield coal-fired power plant by another six months to  3Q14  (from  1Q14).  The plant is in  Chhattisgarh, India.  

Lack of contract wins.  Not helping is the lack of major contract wins for Mudajaya thus  far this year. Even if  the group  is to secure new power plant jobs over the immediate term  –  particularly  the  civil work package worth  about  MYR1bn  from  the  1,000MW  “Track  3A”/”Manjung  5”  coalfired power plant project – they are unlikely to hit major billing milestones and, hence, contribute significantly in FY14.

Forecasts. We cut FY14/15 net profit forecasts by 65%/31%, as we now expect: i) no contribution from the Indian power plant in FY14 (vis-à-vis the  MYR88.2m  we  had  assumed  before),  and  ii)  the  MYR1bn  in  new jobs  that  we  projected  Mudajaya  to  secure  in  FY14  to  only  start contributing more significantly from FY15 (vis-à-vis FY14 previously).

Risks.  i)  new  contract  wins  in  FY14/15  falling  short  of  our  target  of MYR1.5bn per annum, ii) escalation in input costs, and iii) further delays in the COD of its power plant project in India which may contribute about half of Mudajaya’s PBT in FY15 based on our forecasts.

Maintain NEUTRAL.  We believe the market is only likely to re-rate the stock when it becomes clear that its India power plant will be close to upand-running.  We reduce our FV by 5% to MYR2.71 (from MYR2.85) as we roll forward our valuation base year to FY15  (from FY14). Our FV is based on 10x FY15F  EPS,  which is  in line with our benchmark 1-year forward target P/Es of 10-16x for the construction sector.

A Soft Patch In FY14

Indian power plant delayed by six more months. We project Mudajaya’s earnings recovery to be delayed by a year to FY15 from FY14. This follows the deferment of the COD for Unit 1 of its 4 x 360MW greenfield coal-fired power plant in Chhattisgarh, India, by another six months to 3Q14 from  1Q14  previously.  CODs of the remaining three units will be at intervals of three months from the COD of the preceding unit.Lack  of  contract  wins.  Not  helping  either  is  the  lack  of  major  contract  wins  for Mudajaya  thus  far  this  year  to  beef  up  its  construction  orderbook.  At  present,  the 
group’s  outstanding construction orderbook  stands at MYR1.2bn. This  is  equivalent to only about 0.9x its FY13 construction turnover   vis-à-vis  the  2-3x for most  of the construction  companies  under  our  coverage.  Given  its  current  involvement  in  the 1,000MW “Tanjung Bin 4” and “Manjung 4” coal-fired power plant projects,  Mudajaya 
is well positioned to bag more power plant jobs ,  particularly the civil work package worth  about  MYR1bn  from  the  1,000MW  “Track  3A”/”Manjung  5”  coal-fired  power plant project. However,  even if these power plant jobs  were to  materialise over the immediate  term,  they  are  unlikely  to  hit  major  billing  milestones  and,  hence, contribute significantly in FY14. 

Forecasts.  We cut FY14/15 net profit  forecasts by 65%/31%,  as we now expect: i) no  contribution  from  the  Indian  power  plant  in  FY14  (vis-à-vis  the  MYR88.2m  we assumed  previously),  and  ii)  the  MYR1bn  in  new  jobs  that  we  had  projected Mudajaya to secure in FY14 to only start contributing more significantly from FY15 (vis-à-vis FY14 previously), given the timing issue mentioned earlier.  

Maintain NEUTRAL. For Mudajaya we believe the market is only likely to re-rate the stock when it becomes clear that  its 4 x 360MW greenfield coal-fired power plant in India  will  soon  be  up-and-running.  FV  is  only  reduced  by  5%  to  MYR2.71  (from MYR2.85) as we roll forward our valuation base year to FY15 (from FY14). Our FV is based on 10x FY15F  EPS, which is in line with our benchmark 1-year forward target P/Es of 10-16x for the construction sector.
We believe investors should stay  invested  in  the  construction sector  on  the  strong earnings  visibility  that  is  backed  by:  i)  record  or  close-to-record  outstanding orderbooks  for most players at present, and ii) more new  jobs in the pipeline. The latter  includes: i)  the Klang Valley MRT Line 2 project,  ii)  Kwasa Damansara,  iii)  the refinery and petrochemical integrated development (RAPID) project in Pengerang, iv) several new toll roads, and v) the “Track 3A” and “Track 3B” power plant projects.

Risks.  i) new contract wins in FY14/15 falling short of our target of MYR1.5bn per annum, ii) escalation in input costs, and iii) further delays in the COD of its power plant  project in  India,  which  may  contribute  about  half  of  Mudajaya’s  PBT  in  FY15 based on our forecasts.

Financial Exhibits

SWOT Analysis

Company Profile

Mudajaya is a construction company with its niche strength in power plant construction. It owns a 26% stake in a 4 x 360MW greenfield power plant in Chhattisgarh, India, currently still under construction.

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Source: RHB