Let me try to explain why I have to add the interest cost to get the net operating cash flow. It is mathematical.

Project investment = US$1870m
Payback Period = 8 years

Calculation to determine the payback period;

Project Investment (PI)/(Net operating cash flow (OCF) - Interest costs(I)) = Payback period (P)

Hence,

PI/(OCF - I) = P
OCF = PI/P + I

OCF = 1870/8 + I
Operating Cash Flow = US$233.7m + Interest costs
29/09/2019 8:08 PM

Valuelurker,

RM300-500m is my own unsubstantiated estimates.

The rests are derived from various methodologies which I have provided clear workings.

Even if you think your estimates are more superior than mine, there is no need to call name unless I have in some ways got into your nerves. Do you have other identities?

I never insisted on anyone to believe in my estimates Why force me to believe in your estimates which you are unable to elaborate ?

You are not obligated to me and neither am I to you. Why bother me ?


p/s I m saving this for future reference.

----------------------------
valuelurker Management said in AGM 2019 that its RM80-100mil..?

And here in this post, you say its RM197-263mil (previously it was RM300-500mil lol)

That's why its dangerous to give stupid people who are nerds (no, nerds are not sharp theyre dumb people who read a lot but are really slow and never quite get it) the internet, they read a little and think they know how its done

No, I do not have access to management, neither am I related to JAKS in anyway whatsoever

1. A long time ago, I mentioned the construction 'profits' are not real, they are merely accounting profits

2. I shared articles / links on the payback period and IRR from Jaks management

3. I mentioned profits attributable to Jaks was RM80-100mil a long time ago

And still this donkey66 doesnt wanna believe

Make sure you dont delete this article. A

nd make sure you hold your stock, in fact better keep adding and sialang since by your calculations, NPV per share is worth min RM2.93

Sometimes, you have to lose money to learn the one truth:

Youre pro or youre a noob, thats life
29/09/2019 5:59 PM

The capital structure of all Vietnam BOT contracts in power plant has debt/equity ratio of 75:25. This is not a coincident, it is the capital structure agreed with the Vietnam government.

The capital requirement is too huge and hence the borrowing cost is too big to be left out of consideration in decision making.

Even the loan is on non-recourse basis so as not to cause to much leverage to hinder future borrowing capacity of the parent companies.

Finally, I wish to thank Kcchongnz for his constructive inputs. Thank you.

Jaks management has not openly made any profit forecast in public nor given any estimates to the investment bankers or analysts.

The management told the shareholders during 2018 AGM that the profit will be more than RM100m, but during the 2019 AGM, it became RM80m-100m. I really don't know what to say.

I can only guess that the RM100m provided by the management actually refers to cash distribution instead of FCF or profit. This is roughly in line with distribution made by Mong Duong II.

----------------------------
Another question is why did the management guided that the cash flow to the company was about RM100m only, which is substantially less than what is being estimated by you and me? is it because our estimation of cash flows based on assumption of the payback period was incorrect? Or the management deliberately hiding something? For example something not related to our "pay", but rather more on "kick".

Dear Sslee and Kcchongnz,

The centre of discussion revolves around whether interest costs have been netted off from the net cash flow used in calculating the 8 years payback period.

In my opinion, the US$233.7m represents net cash flow after netting off interest costs.

My arguments

1) 8 years payback period means the JV will take 8 years to recoup its initial investment of US$1870m (including borrowings) in CASH from operating the power plant. In another word, if the power plant halts operation after the 8th year, the JV doesn’t suffer any losses except time value of initial investment funds. To achieve break even in 8 years, the US$233.7m annual cash flow should not be utilized for interest payments. Otherwise, it will take 11 years to break even.

2) As I have demonstrated, if part of the US$233.7m is applied towards interest payments, the project IRR is just 7.5% which is far below the 12% IRR guided by management. The interest costs need to be added to the US$233.7m cash flow to arrive at 12% IRR.

3) Article paper "Payback Period and NPV: Their Different Cash Flows" by Kavous Ardalan

https://www.economics-finance.org/jefe/volume11-2/01.Payback%20Period%...

"However, in the Payback Period, there is no discounting involved and, therefore, the interest expense (after taxes) and dividend payments should be deducted from the operating cash flows when calculating the relevant cash flows for the Payback Period rule. " - Page 15

This article found that it is the net cash flow after interest costs to be used in calculating payback period.

Thank You

Let me put forward my arguments ..... please wait

What I mean is interest costs should be added back to get the net cash flow from operation.

eg. for year 1 (234+84), year 2 (234+79) etc

Year
.. -468
.. -468
.. -468
.. -468
1 318
2 313
3 309
4 304
5 299
6 295
7 290
8 285
9 281
10 276
11 271
12 267
13 262
14 257
15 252
16 248
17 243
18 238
19 234
20 234
21 234
22 234
23 234
24 234
25 234
IRR 12.09%

Note that interest rate affects the IRR calculation.

-----------------------------------------
DK66, I agree with your cash flows estimation here, but not sure what you mean by your statement that it has netted off the interest cost.

However, if the US$234 has already netted off the interest costs, the project IRR increase to 9.76%. Still below 12% but closer.

Year
..-468
..-468
..-468
..-468
1 234
2 234
3 234
4 234
5 234
6 234
7 234
8 234
9 234
10 234
11 234
12 234
13 234
14 234
15 234
16 234
17 234
18 234
19 234
20 234
21 234
22 234
23 234
24 234
25 234
IRR 9.76%

I wish i3 can improve on tabulation writings

In any case, even if I changed the principal payment to yearly US$78m, the project IRR is still only 7.5%

Year .......Principal .Int ..Principal ..Cash Flow
-----------------------(I) -----(P)--- ..(-468)
...................................................(-468)
...................................................(-468)
...................................................(-468)
1 ....234 ....1,400 ....84 ....78 .... .......150
2 ....234 ..............79 ....78 ... ........155
3 ....234...............75 ....78 .... .......159
4 ....234 ..............70 ....78 .... .......164
5 ....234 ..............65 ....78 .... .......169
6 ....234 ..............61 ....78 .... .......173
7 ....234...............56 ....78 .... .......178
8 ....234 ..............51 ....78 .... .......183
9 ....234 ..............47 ....78 .... .......187
10 ...234 ..............42 ....78 .... .......192
11 ...234 ..............37 ....78 .... .......197
12 ...234 ..............33 ....78 .... .......201
13 ...234 ..............28 ....78 .... .......206
14 ...234 ..............23 ....78.... ........211
15 ...234 ..............18 ....78 .... .......216
16... 234 ..............14 ....78 .... .......220
17 ...234 ...............9 ... 78..... .......225
18... 234 ...............4 ... 78 ........... 230
19 ...234.........................................234
20 ...234 ........................................234
21 ...234 ........................................234
22 ...234 ........................................234
23 ...234 ........................................234
24 ...234 ........................................234
25 ...234 ........................................234
....................... 796... 1404 ......IRR 7.5%

Cash flow per year of US$58 is only about half of the annual distribution made by Mong Duong II. Doesn't seem reasonable.

-----------------------------------------
kcchongnz Payback period.

Initial outlay by JV = USD468m

Payback period = 8 years

Cash flow per year = 468/8 = USD58m

If we use USD 58m of cash inflow, you will find that the IRR for the equity shareholders of the JV is actually very close to 12%.
29/09/2019 10:32 AM

Trying my best to make it readable
Year .......Principal .Int ..Principal Total ..Cash Flow
-----------------------(I) -----(P)--- (I+P)..(-468)
.........................................................(-468)
.........................................................(-468)
.........................................................(-468)
1 ....234 ....1,400 ....84 ....38 ....122 .......150
2 ....234 ....1,362 ....82 ....40 ....122 .......152
3 ....234.... 1,322 ....79 ....43 ....122 .......155
4 ....234 ....1,279 ....77 ....45 ....122 .......157
5 ....234 ....1,234 ....74 ....48 ....122 .......160
6 ....234 ....1,186 ....71 ....51 ....122 .......163
7 ....234 ....1,135 ....68 ....54 ....122 .......166
8 ....234 ....1,081 ....65 ....57 ....122 .......169
9 ....234 ....1,024 ....61 ....61 ....122 .......173
10 ...234 ....963 ......58 ....64 ....122 .......176
11 ...234 ....899 ......54 ....68 ....122 .......180
12 ...234 ....831 ......50 ....72 ....122 .......184
13 ...234 ....759 ......46 ....76 ....122 .......188
14 ...234 ....682 ......41 ....81.... 122 .......193
15 ...234 ....601 ......36 ....86 ....122 .......198
16... 234 ....516 ......31 ....91 ....122 .......203
17 ...234 ....424 ......25 ....97 ....122 .......209
18... 234 ....328 ......20 ....102 ...122....... 214
19 ...234 ....226 ......14 ....108 ...122 .......220
20 ...234 ....117 ......7 .....115 ...122 .......227
21 ...234 ...............................................234
22 ...234 ...............................................234
23 ...234 ...............................................234
24 ...234 ...............................................234
25 ...234 ...............................................234
.......................1042... 1398 ..........IRR 7.03%

Kcchongnz,

I computed in detail your cash flow estimate and found that the project IRR is 7.03%.

18 installment of US$122m means a total interest payment of US$796m

I found that at 6% interest rate and equal annual installment of US$122m will only pay off the loan in 20 years. The total interest payment would be US$1042m

Unfortunately, when i tried to post workings here, it becomes unreadable;

Year Principal Interest Principal Total Cash Flow
(I) (P) (I+P) -468
-468
-468
-468
1 234 1,400 84 38 122 150
2 234 1,362 82 40 122 152
3 234 1,322 79 43 122 155
4 234 1,279 77 45 122 157
5 234 1,234 74 48 122 160
6 234 1,186 71 51 122 163
7 234 1,135 68 54 122 166
8 234 1,081 65 57 122 169
9 234 1,024 61 61 122 173
10 234 963 58 64 122 176
11 234 899 54 68 122 180
12 234 831 50 72 122 184
13 234 759 46 76 122 188
14 234 682 41 81 122 193
15 234 601 36 86 122 198
16 234 516 31 91 122 203
17 234 424 25 97 122 209
18 234 328 20 102 122 214
19 234 226 14 108 122 220
20 234 117 7 115 122 227
21 234 234
22 234 234
23 234 234
24 234 234
25 234 234
1042 1398 IRR 7.03%

stockraider,

Armada ???????????

Kcchongnz,

What you are calculating is equity IRR not Project IRR.

Please allow me some times to come back to you my observations on your computation in detail.

Thank you for your active contribution.

--------------------------------------
kcchongnz Payback period.

Initial outlay by JV = USD468m

Payback period = 8 years

Cash flow per year = 468/8 = USD58m

If we use USD 58m of cash inflow, you will find that the IRR for the equity shareholders of the JV is actually very close to 12%.

Article paper "Payback Period and NPV: Their Different Cash Flows" by Kavous Ardalan

https://www.economics-finance.org/jefe/volume11-2/01.Payback%20Period%20and%20NPV%20Their%20Different%20Cash%20Flows.pdf

"However, in the Payback Period, there is no discounting involved and, therefore, the interest expense (after taxes) and dividend payments should be deducted from the operating cash flows when calculating the relevant cash flows for the Payback Period rule. " - Page 15

The above article found that it is the net cash flow after interest costs to be used in calculating payback period.

Therefore, the cash flow derived from dividing the project cost by the payback period has already netted off borrowing costs.

https://www.theedgemarkets.com/article/jaks-eyes-break-even-vietnam-project-eight-years

Kcchongnz,

In any case, what is your estimate of Jaks' power plant worth given your estimate of RM141m FCF ?

Kcchongnz,

Your estimate of cash flow has an implied IRR of 5%. Management has guided an IRR of 12%

sosfinance, could you elaborate on your point ?

Note that the BOT contract grants only 25 years of operation. If you included the equity capital costs of say 10%, the payback period is even longer.

Considering the operational risks, it doesn't make business sense to invest in a project with less than 8 years to profit.

It was agreed and determined at the onset the project negotiation that the project will be financed by 75% debts. Moreover, the PPA allowed for adjustment for difference in implied interest rate and finalised interest rate upon achieving loan closure. This suggests that the payback period has imputed interest costs in its computation.

In my opinion, using the company's WACC is irrelevant at this point in time as the company has already decided to invest in the project.

I have used discount rates from 6% to 12% to cater for different investors' risk appetite. If you require an investment return of 12%, then the project is worth less to you compared to someone who only required 6% investment return.

The required investment return also depends on the risk profile of the business. Power generation business is generally considered low risk.

-----------------------------------

As Andy punya 8 yrs payback period is refering to the payback period of the IPP project jadi the more appropriate rate is the weighted average cost of funds of the co undertaking the project

SarifahSelinder For clarification in.. your targeted rate of return... your in siapa? Refering to the co or refering to DK66 the investor in JAKS?

Kcchongnz

I do not know for certain whether the interest cost has been taken into consideration in arriving at the 8 years payback period. However, if it is not, simulated using 6% interest rate, the actual payback period would be around 17 years and the implied IRR will be only 5%. Is that reasonable ?

The jump in cash flow from year 19 onward as the maximum loan tenure is 18 years

-------------------------------------
kcchongnz Just for discussion purpose,

1)In project financial appraisal, when estimating cash flows from total project cost through the payback period, it should not have included interest payment.

2) Hence annual repayment of loan must include interest payment, in accordance with an amortization table. This amount is very big for a 18 years payment. It is somewhere near 120m-130m a year if say interest rate is 6%-8%.

3)Cash flows should increase over the years but not sure why the jump in cash flows from RM197m to RM295m from year 19 to 25.
28/09/2019 11:21 AM

My last two articles demonstrated that Jaks' current market price of RM0.75 is way below valuations derived using the payback or the DCF methods

The big range is due to the wide range of discount rates used in the sensitivity analysis. If you demand lower rate of return in your investment, then the NPV of Hai duong cash flows become more attractive to you.

I have included the cash flow patterns

https://klse.i3investor.com/blogs/Jaks%20resources/227063.jsp

I welcome constructive comments

https://klse.i3investor.com/blogs/Jaks%20resources/227063.jsp

https://klse.i3investor.com/blogs/Jaks%20resources/227063.jsp

Thanks wiseeye

Kcchongnz,

In your opinion, what would be the most appropriate discount rate to use for NPV calculation ?

Kcchongnz,

In your opinion, what would be the most appropriate discount rate to use for NPV calculation ?

I m truely happy for Sslee to see Insas finally making a decent move in its share price. He put in so much effort even to the extent of meeting the management. He is definitely the best person to approach in i3investor to know more about Insas. Well done.

I assume you are referring to my article on comparison with MFCB. 4.2 is the exchange rate for conversion of US$ to RM

Assuming only RM100m profit to Jaks, what would be the payback period ?


Total power plant profit = Jaks' RM100m profit / 30% = US$80m

+ depreciation US$74.8m

= Total cash flow of US$ 154.8m

Payback period = US$1,870m / 154.8m = 12.08 years

This is not consistent with the 8 years payback period given by the management.

Valuelurker,

You may be right in your estimates, but you don't have to be rude.

Of course, I m aware that cash flows and profit are different and the difference is taken care of in my calculation.

All readers here will appreciate if you could provide some forms of calculations of your RM80-RM100m profit figure.

I have provided several workings for my estimates.

Or can you at least point out my errors so that I can reconsider ?

----------------------
valuelurker Lol cashflows and profits are not the same la donkey66

As I have repeatedly mentioned: -

RM80-100mil profit per annum

In a year you will find out
25/09/2019 8:57 PM

Kcchongnz,

Thanks for the compliment.

I agree that the net cash flow after loan interest and repayment is significantly lower as the project is financed by 75:25 debt equity ratio.

I also agree that to determine all future cash flows for the purpose of evaluating Jaks valuation using discounted cash flow method, one must use the eventual NET cash flows after all loan and interest repayment.

However, as it is still very much debated on the earnings capability of the Hai Duong power plant, hence, this article only tried to "work backward" using the 8 years payback period to derive the net cash flow. Then, using the net cash flow to determine the accounting profit by deducting the depreciation.

Normally, the management has to determine the net cash flow from operation using the PPA. Then deduct the loan interest expense to get the Net cash flow for calculation of payback period. The loan repayments are not deducted for this purpose as they form part of the investment payback.

Kcchongnz,

The payback period refers to the amount of time it takes to recover the cost of investment. That is when the investor gets the entire invested capital including borrowings back in CASH.

So, it is the NET cash flow after loan interest but before loan repayment, if any, to be used in calculating the payback period.

To derive the accounting profit, you have to deduct the non-cash expenses. The biggest item is depreciation. The minor accrued expenses are ignored.

There is 102m outstanding warrants. A 15.8% dilution when the warrants are exercised.


--------------------------
kcchongnz Just curious.

Do you have to make annual loan repayment and interest that comes with it?

Are you looking at profit, or cash flows, or a combination of it?

Which is the relevant figure, profit or cash flows?

What is the eventual total number of Jaks shares outstanding?
25/09/2019 7:05 PM

https://klse.i3investor.com/blogs/Jaks%20resources/226512.jsp

Mfcb profit projection of RM200m by the management is inline with its guideline of 5.5 years payback period. However, the RM80m-100m profit given by Jaks management is too far from its guideline of 8 year payback period. Too conservative ??

Yes, MFCB is a good indication. 80% interest in a 260MW hydro plant in Loas. According to Public Investment, it is able to bring in RM200 - RM250m annual profit.

https://www.theedgemarkets.com/article/mega-firsts-laos-turbine-likely...

Jaks will have 40% effective interest in a 1200MW power plant ..............

On point to note here is CPECC guaranteed the entire bank financing and undertook to completed the project. This means that if the power plant project failed entirely, CPECC will have to bear the entire losses.

The potential investment returns from its eventual 60% economic interest in the power plant must be high enough so as to commensurate the risk of entire losses.

Of course, the risk of loss dependent very much on CPECC's confidence in completing the project successfully on time.

Jaks earnings in Q1 2020 will still be dominated by profit from EPC contract

Investar2862, You are welcome.

------------------
Investar2862 Thank you @DK66 for your generous sharing.
You have contributed a lot to this JAKS forum.
Good job.

Based on the billings, should be around US$160m as at june 2019

Ricky Kiat,

You are welcome

----------------
Ricky Kiat bro dk66 , big thanks to u.

Dear Sslee,

Thanks, I m glad that you like the article.

For those who wish to study the joint venture agreement in detail

http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=171520&name=EA_DS_ATTACHMENTS

https://klse.i3investor.com/blogs/Jaks%20resources/226058.jsp