Posted by DK66 > 2020-05-08 20:50 | Report Abuse

Investee, it is because of the magnitude of the interest cost is too huge not to be taken into consideration when arriving at the project IRR.

Posted by DK66 > 2020-05-08 20:52 | Report Abuse

If you do not include the interest cost to the net cash flow in the IRR calculation, the cash flow derived would not have taken the interest cost into consideration. In arriving at the net profit, you have to deduct the interest cost. The resultant amount would be very small. Practically, the project will not be considered worthwhile.

Posted by DK66 > 2020-05-08 20:54 | Report Abuse

consider carefully, there is no double pay

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Investee Btw, I read the parameter guideline. It's does say equity and debt capital plus repayment of original loan as part of "spending". Sound weird to double pay though.
08/05/2020 8:17 PM

Posted by DK66 > 2020-05-08 21:01 | Report Abuse

RM651m is net profit, not free cash flow
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Investee If you don't mind, I would like to ask here. I cannot get what you mean. Is it possible to add more colour as to why cannot get near Vinh Tan 1 result without debt capital? I simply tried with U$1.8b upfront capital, RM651m p.a. over 25 years BOT. It's a lot lower than 12% IRR.

Posted by Investee > 2020-05-09 10:55 | Report Abuse

Yea, I figured that out after posting. So now I have FCF -623m for first 3 years, +284m for subsequent 25 years.

-623m is 1.87b / 3 years
+284 is RM651m / 4 (convert to USD) + 75m depr (1.87b/25) + 46 interest (@3.5% of 1.4b)

With the above then I can get close to zero NPV at 12% discount but this is unlevered FCF calculation though.

My confusion is whether 12% IRR is for levered or unlevered. Unlevered meaning I consider -623m in first 3 years with no principal or interest in subsequent years. Levered meaning I consider 25% x -623m = 156m in first 3 years + principal & interest repayment over subsequent 15 years. It's either or situation, right?

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RM651m is net profit, not free cash flow
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Investee If you don't mind, I would like to ask here. I cannot get what you mean. Is it possible to add more colour as to why cannot get near Vinh Tan 1 result without debt capital? I simply tried with U$1.8b upfront capital, RM651m p.a. over 25 years BOT. It's a lot lower than 12% IRR.

Posted by Investee > 2020-05-09 10:55 | Report Abuse

Thanks for explaining so far though.

Posted by DK66 > 2020-05-09 11:11 | Report Abuse

Investee, you are welcome. Your calculation is mostly right except that you should replace depr with principal repayment.

If you take the entire investment capital as initial outlay, you are calculating project IRR.

If you are only taking the equity capital as initial outlay, you are calculating Equity IRR.

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Investee Yea, I figured that out after posting. So now I have FCF -623m for first 3 years, +284m for subsequent 25 years.

-623m is 1.87b / 3 years
+284 is RM651m / 4 (convert to USD) + 75m depr (1.87b/25) + 46 interest (@3.5% of 1.4b)

With the above then I can get close to zero NPV at 12% discount but this is unlevered FCF calculation though.

My confusion is whether 12% IRR is for levered or unlevered. Unlevered meaning I consider -623m in first 3 years with no principal or interest in subsequent years. Levered meaning I consider 25% x -623m = 156m in first 3 years + principal & interest repayment over subsequent 15 years. It's either or situation, right?
09/05/2020 11:09 AM

Posted by Investee > 2020-05-09 17:05 | Report Abuse

Sorry I lost you there. If I read you correctly, we get FCF by PAT + Principal Repayment + Interest. I thought:

(1) FCF = EBITDA - Principal Repayment - Interest & Tax Paid
(2) FCF = (PAT + Interest Expense + Tax Expense + Depr) - Principal Repayment - Interest & Tax Paid
(3) FCF = PAT + Depr - Principal Repayment, assuming Paid = P/L Expenses

When I use your formula FCF = RM651m / 4 + 94m principal repayment + 46m interest for 25 years versus 1.87b outlay, I do get close to zero NPV @ 12% discount but I just don't understand why we add back principal repayment to PAT to arrive at FCF?

I understand the diff between project and equity IRR. The question is whether 12% IRR applies to project or equity IRR.

Thanks for shedding some light here.
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DK66 Investee, you are welcome. Your calculation is mostly right except that you should replace depr with principal repayment.

If you take the entire investment capital as initial outlay, you are calculating project IRR.

If you are only taking the equity capital as initial outlay, you are calculating Equity IRR.

Posted by DK66 > 2020-05-09 17:15 | Report Abuse

Investee, I mistaken you, I forgot that you are working backward with Vinh Tan's Profit. In that case, should add back depr instead of repayment. What was the IRR arrived by you ? Let me know the figure then I explain further.

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Investee Sorry I lost you there. If I read you correctly, we get FCF by PAT + Principal Repayment + Interest. I thought:

(1) FCF = EBITDA - Principal Repayment - Interest & Tax Paid
(2) FCF = (PAT + Interest Expense + Tax Expense + Depr) - Principal Repayment - Interest & Tax Paid
(3) FCF = PAT + Depr - Principal Repayment, assuming Paid = P/L Expenses

When I use your formula FCF = RM651m / 4 + 94m principal repayment + 46m interest for 25 years versus 1.87b outlay, I do get close to zero NPV @ 12% discount but I just don't understand why we add back principal repayment to PAT to arrive at FCF?

I understand the diff between project and equity IRR. The question is whether 12% IRR applies to project or equity IRR.

Thanks for shedding some light here.
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Posted by DK66 > 2020-05-09 17:21 | Report Abuse

Investee, you need higher IRR to get NPV to 0

Posted by DK66 > 2020-05-09 17:23 | Report Abuse

Originally I thought you were forecasting the FCF from scrap to arrive at 12% IRR in which case you should not use depr because it is a non cash item.

Posted by Investee > 2020-05-09 23:28 | Report Abuse

Unlevered IRR about 12.7% with -623m first 3 years and +284m for subsequent 25 years.

(1) -623m is 1.87b / 3 years
(2) +284 is RM651m / 4 (convert to USD) + 75m depr (1.87b/25) + 46 interest (@3.5% of 1.4b)

Levered IRR about 23.0% with
(1) -156m first 3 years (25% of 1.87b / 3)
(2) +284m minus fixed principal repayment of 94m and reducing interest for subsequent 15 years.
(3) Once debt is paid off after 15 years then FCF will be +284m until end of 25-year concession.

I'm not sure the IRR 12% stated in Circular 56/2014 is granted for levered or unlevered FCF. I get confused with Appendix 2 of the circular. Working backward from Vinh Tan 1 sounds like it's unlevered FCF 12% IRR. Do you get me?

With that said, Vinh Tan 1 profit may have one-off gain which we cannot tell.

Posted by DK66 > 2020-05-09 23:54 | Report Abuse

Please revise the interest rate to 6% and see what happen. Interest rate of 3.5% is too low

Posted by DK66 > 2020-05-09 23:58 | Report Abuse

I do not understand why you used 2 different FCF

(2) +284 is RM651m / 4 (convert to USD) + 75m depr (1.87b/25) + 46 interest (@3.5% of 1.4b)


(2) +284m minus fixed principal repayment of 94m and reducing interest for subsequent 15 years.

Posted by DK66 > 2020-05-10 00:01 | Report Abuse

I m now confused by your meaning of levered and unlevered

Posted by DK66 > 2020-05-10 00:01 | Report Abuse

Do they refer to Project IRR and Equity IRR ?

Posted by DK66 > 2020-05-13 08:29 | Report Abuse

I need to post the comment here to update the reader of this article.

Note that Vinh Tan 1 and JHDP will be adopting the same accounting treatment of their power plant assets. This enhances the comparability of Vinh Tan 1 to JHDP.

Stock: [JAKS]: JAKS RESOURCES BHD

May 12, 2020 1:29 PM | Report Abuse

Dear All,

Even though the american owner of Mong Duong II has adopted the new accounting standard ASC606, this is not happening to JHDP. JHDP will adopt the same accounting standard as Vinh Tan 1.

I wish to express my deepest appreciation to Mr OTB for his assistance in getting the confirmation from the Vietnam auditor. Thank you

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Stock: [JAKS]: JAKS RESOURCES BHD

May 8, 2020 11:47 AM | Report Abuse

DK66 I am accountant, I know accounting treatment can have profound effect on the reporting of earnings especially when dealing with a transaction which spans as long as 25 years. Mong Dong II started operation in April 2015 and has written back as much USD203m when it adopted the new accounting standard in 2018 with USD40m increase in profit in 2018 alone as a result of change in accounting treatment.

Vinh Tan 1 is still using the old accounting standard. If JHDP is adopting the new accounting standard, It may be reporting higher profit than Vinh Tan 1.
08/05/2020 10:17 AM

Posted by Investee > 2020-05-14 15:33 | Report Abuse

Hey DK66, out of curiosity. Why Vinh Tan 1 is a better comparable as compared to Mong Duong 2? Or actually they are pretty similar?

Posted by DK66 > 2020-05-14 21:24 | Report Abuse

There are all very similar. Only that we don't have the results for Mong Duong II.
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Investee Hey DK66, out of curiosity. Why Vinh Tan 1 is a better comparable as compared to Mong Duong 2? Or actually they are pretty similar?
14/05/2020 3:33 PM