Stockman blogs
Jaks....emerging jewel
stockmanmy
Publish date: Fri, 13 Jan 2017, 02:35 AM
stockmanmy
0 76
Trade at your own risk. I am here only to vomit out my feelings
Background
Jaks broke out of its tight trading range on 10 Jan 2017 , the day Public Bank Research initiate d coverage on Jaks with a Buy recommendation. It has been trading at a high volume since.
Full report here.....( to be read in conjunction with this article)
http://klse.i3investor.com/blogs/PublicInvest/113441.jsp
It is also the primary source of much that follows below.
.
Background of the Company.
Known as a pipe manufacturing company.
But in recent years has successfully transformed /
transforming itself into an Independent Power Producer (IPP) and construction company.
Also ventured into property development with the Evolve Mall and Pacific Star Condominiums but property development will be playing a lesser role in future
IPP
This is a 30%/70% JV (US$ 1.87 billion project) between Jaks and China Power Engineering Consulting Group Co Ltd (CPECC) for the BOT ( Build Operate Transfer) of 2 X 600 Megawatts Coal Powered Electricity Plant in Vietnam.
The JV company has secured US$1.4bn (c.RM5.8bn) in financing, or 75% of project costs. Works have commenced in 2QCY16, with the first phase to be completed by 2020
Bank borrowings , already secured 70% US$ 1.4 billion
Equity 30% US$ 470 million
The technical EPC works will be awarded to CPECC while Jaks would be responsible for non-technical civil works worth US$ 454.5m. The job is expected to enjoy margins of c.20% PAT, which we understand that most of the EPC gains expected to be redeployed into the JV company that would ease the capital requirement upfront.
EPC: Engineering, Procurement and Construction.
Fundings for the JV
Jaks 30% stake US$ 140 million
Already invested US$ 30 million
To be invested US$ 110 million
Gains from EPC US$ 91 million
Balance needed US$ 19 million to be funded by proceeds from its proposed disposal of non-core assets.
Gains for the EPC over 4 years is US$ 91 million
Averaging US$ 22.75 million ( about RM 100 million p.a.) will be added straight to the Profits After Tax of Jaks from 2017 to 2020. This way of financing / structure allows Jaks to show immediate financial gains from FY 2017 ( in fact, some already accrued in FY 2016)
Value Added
Direct addition to the worth of Jaks as follows:
Hai Duong IPP - FCF NPV at 12% equity cost is RM 1.096 billion
value to Jaks @30% $ 329 million (or 75 sen share)
gains from EPC Contract US$ 91 million or $ 409.5 million
discounted value to Jaks $ 298 million (or 68 sen per share)
This JV alone adds $ 1.41 per share to the value of Jaks based on discounted cash flows projections over the life of the the EPC and the IPP. In other words, based on projections, the NPV of Jaks has increased by $ 1.41 as a result of this project
Technical and timing considerations
Jaks reached a high of $ 1.30 end 2015, then retraced to bottom at 84 sen by mid 2016., due to the disappointing interim results of the first two quarters. The share has been trading at a tight range since mid August at around $ 1.05 and a few days ago suddenly broke resistance and have been trading at high volumes since then. The obvious catalyst is the initiation report by PBR giving a buy recommendation with TP $ 1.50.
Looks like a good technical buy position right now.
Financial wise, it reported good set of figure for the Q3 ended Sept 2016 with record revenue of $209 million and earnings of $ 13.8 million and eps of 3.1 sen in spite of losing $ 12 million on property development / investment divisions. This is the first time, effects of the EPC is starting to be reflected in the accounts. ...More to come, much much more of the EPC throughout 2017 and beyond.
It is possible a new re rating has just started . Not many have known about the jewels within. This could be the catalysts for the share out performance.
Construction division
Order book
EPC from the JV $ 1800 million
Suke 500
Pipe laying and other infrastructure works 600
Total $ 2900 million
As can be seen from here, the Company is also very active in getting local construction jobs.
Jaks also has a tender order book of more than $ 2 billion.
Balance Sheet Review
As at Sept 2017
NTA $ 1.20
Net borrowings $ 414 million Net gearing 68%
Investment properties $ 447 million
Property Development cost $ 296 million
These to be liquidated as much as possible
Shareholdings.
NOSH , 438 million of which the Directors holding at April 2016 is only 13.1 %. Of the 30 top shareholders, almost all are institutions with AIA the largest at 5%. This is a very dispersed and very liquid share.
Directors control is tedious at best.
Notable is that the shareholdings of the CEO, Mr Ang Lam Poah has increased from 32.6 million (7.44%) ) as at April 2016 to 38.147 million ( 8.7 % ) through active market purchases in recent months.
Conclusion
This is not an over night success. They started the IPP proposals more than 4 years ago. Took them a long time to reach this stage.
They have ventured into property developments with muted success. Tenancy at Evolve Mall of 60% was not enough to cover costs and losses reported. But occupation rate is expected to have reached 80% by now , location at Ara Damansara is good , and I see eventually success of the projects. It is well designed and at a good location.
On construction side, they have been very successful with $ 500 million Suke ( the Sungei Besi Ulu Klang toll road ) contract and others valued at $ 600 million.
The crown jewel is of course the Vietnam IPP.
The long term strategic plans work, and they seem very ambitious. This despite the low level of shareholdings by the directors.
I see TP of $ 1.50 as being too conservative.
Year end TP of $ 2.00 is more reasonable
Major catalysts include
Impressive results throughout 2017.
Sales of non core assets
Publicity and awareness to be created
Share purchases by the CEO
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Discussions
4 people like this. Showing 50 of 51 comments
would be good if it can drop back to $ 1.10.
A lot of people can be satisfied that way.
2017-01-13 12:21
Hai Duong IPP - FCF NPV at 12% equity cost is RM 1.096 billion
value to Jaks @30% $ 329 million (or 75 sen share)
gains from EPC Contract US$ 91 million or $ 409.5 million
discounted value to Jaks $ 298 million (or 68 sen per share)
discounting a cash flow at 12% has factored in some risk elements.
The real gain is more than 75 sen and 68 sen respectively.
so, if you add current NTA $ 1.20 + .75 + .68 + X factor.,
the worth of the Company share is $ 2.63 plus X factor.
2017-01-14 11:34
in shares of long gestation period such as this, it is easy to be too early by a few years..eg buying at peak last year........but now, the EPC income is coming in already.
2017-01-14 11:38
Errr,,, The job is expected to enjoy margins of c.20% PAT .
Could Stockmanmy shed some light for the above PAT ?
My understanding is, M&E rarely can achieve the 20% PAT.
2017-01-14 16:38
but this is a fixed one ....left hand , right hand....arranged marriage.
2017-01-14 17:42
Hai Duong IPP - FCF NPV at 12% equity cost is RM 1.096 billion
value to Jaks @30% $ 329 million (or 75 sen share)
gains from EPC Contract US$ 91 million or $ 409.5 million
discounted value to Jaks $ 298 million (or 68 sen per share)
discounting a cash flow at 12% has factored in some risk elements.
The real gain is more than 75 sen and 68 sen respectively.
so, if you add current NTA $ 1.20 + .75 + .68 + X factor.,
the worth of the Company share is $ 2.63 plus X factor
correction
OF COURSE, NTA CAN ALSO BE REPLACED VALUE OF JAKS WITHOUT THE IPP + .75 + .68 + X factor.
2017-01-14 17:53
Jaks n CPECC form JV n both wil overbil JV wit arranged marriage.. left hand to right hand so is thr real profit?? Won't tat increase d cost of d IPP n reduce profit in future?
How it work? Can explain?
stockmanmy but this is a fixed one ....left hand , right hand....arranged marriage.
14/01/2017 17:42
2017-01-14 18:36
its all in the budget and the cashflows....and the bankers have to agree. After all, the bankers are financing 70% of the deal....the bankers have to make sure their interests are protected.
Success of any JV depends on both parties happy and no cheating. CPECC will also over bill./...it is all in the Budget.
According to Public Bank report, a previous IPP budget for similar plant in Vietnam which has gone online is even higher
Since, this is not a pioneer project and got precedent already, the bankers and investors are more willing. Tariffs and attitude of Vietnam government is the crucial piece in the whole puzzle.....not the EPC margin.
2017-01-14 18:51
Tis IPP tariff is fixed or cost plus? Jak up cost has no effect on future profit?
2017-01-14 18:58
the Vietnam government part of the puzzle is the tariffs, not the EPC margin. The tariffs have been agreed.
The bankers are there to make sure the project is viable based on the Budget.
2017-01-14 19:00
Because the parties have to find the golden mean, every thing affects every thing else.
2017-01-14 19:07
Explain u take a EPC profit thn take up d JV loss at same time wat is d point?
2017-01-14 19:08
According to Public Bank report, the IRR of the project is in the mid teens.
If you can find an IPP with IRR in the mid teens, you can easily list it and get a good premium.
2017-01-14 19:15
Right hand put in left hand take out all own funds. If screw up b4 complete Viet govt has liability? I mean like Bakun.
2017-01-14 19:18
Super investors has 3 characteristics.....they receive new information, receptive to new ideas and confidence in own abilities.................................and also buy Jaks. lol
2017-01-14 19:30
Explanations not convicting. In any case IPP very boring. Suitable for dynamic punting??
2017-01-14 19:33
IPP at matured stage is for retirement funds
Jaks at this stage is for dynamic investing.
A game changer
Like it changed Francis Yeoh's life.
2017-01-14 19:35
its business, then people then numbers.....
the real question is....what you think of this second generation Jaks?
they look competent and ambitious.
2017-01-14 19:57
Indian IPP?
Indians all talk.....
But Vietnamese will go places, and this will be successful.
2017-01-14 19:59
It can fail, just like any project can fail...but it cannot get over valued at this floor stage....plenty of stages to come...EPC, IPP, Listing and more.........
OrlandoOil > Jan 14, 2017 07:40 PM | Report Abuse
Now Jak is almost fully valued liao.
2017-01-14 20:07
the bankers think it is bankable...and indeed signed the financing already...
skepticism is good...but inability to take risks, you will never be super investor.
gains always come from taking good risks...and all in when you got good hands.
2017-01-14 20:20
IRR for d duration of d whole IRR revenue for JV only come in after completing b4 all costs capitalise?
2017-01-14 20:39
no doubt, the EPC profits is lumpy and comes to an end after a few years. Of course cannot employ a simple PE on the earnings.
But, will give a boost to the share price and allow lower capital commitment by Jaks.
Probably how all IPPs are being done.
2017-01-14 21:04
just like road concessions....Ekovest, Gamuda, UEM....all done like that.
2017-01-14 21:06
the magic of accounting
costs are capitalised. Income is revenue.
by OrlandoOil > Jan 14, 2017 08:42 PM | Report Abuse
Jaks profit for now is not real everything jz add to own JV IPP cost
2017-01-15 07:46
Profit from EPC are used to off set cost in JV. After completion in 4 years, all sales less ME are net income...Marvellous..huat ar..
2017-01-15 18:50
Jaks....$ 1.03 to $ 1.40 recently...............
Great show already.
Part 2 to start soon.
2017-02-27 21:48
Hai Duong IPP - FCF NPV at 12% equity cost is RM 1.096 billion
How do u work out the maths ?
2017-07-30 16:09
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write your piece.
not enough response.
2017-01-13 10:13