Highlights

The first twin… Last Thursday (11 Jul-13), news portal reported that Coal India and NTPC have finally signed two model fuel-supply agreement (FSA), which has been deadlocked in negotiations for ~1 year. This has set the stage for other power firms to proceed with similar FSAs with Coal India.

Reduced coal risk… This positive development has reduced Mudajaya’s coal supply risk for its India power plant (26% stake). To recap, Mudajaya has a coal linkage contract with Coal India for ~6.2mt/year. Although, the linkage is still under LOA (Letter of Assurance), it will provide clarity on the coal linkage framework and estimated feedstock costing. We believe that the new FSA will see Mudajaya incurring higher feedstock cost from US$20/ton to ~US$30/ton. The cost increase will be offset by its fuel cost pass-through mechanism.

Not yet the inflection point… Although we welcome the positive newsflow on the coal issue, we reiterate our belief that the inflection point to fully unlock Mudajaya’s power plant venture is upon the successful test firing of its power generation units which is currently underway (please refer to our report “Powering towards the inflection point” dated 3 May-13).

The second twin… Suruhanjaya Tenaga has confirmed that TNB has been selected as the preferred bidder for the next 1,000MW coal-fired power plant located at Janamanjung. Mudajaya is currently the civil contractor for the existing 1,000MW Janamanjung power plant extension project worth RM720m.

Edge over rivals… We believe that Mudajaya has the edge over its competitors to continue on as the civil contractor for the next 1,000MW extension project given its lower mobilisation costs, better understanding of the client’s requirements, local value chain knowledge and niche as a power plant civil contractor. If successful (assuming the same contract size of RM720m), it will be a sizable job win for Mudajaya as it represents ~47% of FY12’s construction revenue and ~35% of its outstanding order book of RM2.1bn (see Figure #1). Meanwhile, its outstanding order book translates to a run rate of ~1.3x FY12’s construction revenue.

Risks

Delay in completing the India IPP project; Regulatory and political risk (both local and abroad); Rising raw material prices; Unexpected downturn in the construction sector; and Sharp depreciation in the Indian Rupee and US dollar.

Forecasts

Unchanged.

Rating

BUY

Despite Mudajaya’s conservative approach to bid for projects, we continue to like the company for its niche in sizable infrastructure-related projects. We believe that the company will be able to successfully complete its India power plant project. Both its share price and valuation remains a laggard in the construction sector, hence we are maintaining our BUY call on the company.

Valuation

TP of RM3.53 based on SOP valuation maintained (see Figure #2).

Source: Hong Leong Investment Bank Research - 17 Jul 2013