Mudajaya‟s 2Q results, albeit our recent earnings cut, still came in worse than expected, after netting a paltry RM3.3m (-86.9% QoQ, -92.8% YoY). YTD, the Group‟s net earnings at RM28.4m only accounted for c.35% and 30% of our and consensus full year estimates. The dismal performance was attributed to three factors, namely cost overruns (in projects such as Janamanjung and MRT), curtailment of EP job in India and job accelerations in certain jobs. Outstanding orderbook of c.RM750m will be replenished soon given the c.RM10bn tender book currently in hand. We understand that Mudajaya is eyeing at least c.RM1.5bn of new jobs, coming from the power industry and highway construction. We however leave our new jobs replenishment at RM500m, and believe even if the new jobs come in higher than expected, the earnings will not be meaningful in the near term. Separately, the Group announced the first job in FY14, after clinching the offshore equipment procurement works for its 40%-owned 62MW Wind Energy Farm in Cebu, Philippines for RM375.4m (or c.RM150m effective stake).

RM750m outstanding orderbook, as mentioned in our earlier report needs to be replenished to ensure earnings recovery next year. From the briefing yesterday with the management, we understand that Mudajaya is in the final stages of securing jobs to the tune of RM1.5bn, primarily from the power industry (e.g. Tracks 3B & 4A, Pengerang, etc). We also understand that Mudajaya is looking to add more recurring income assets especially power plants in the emerging markets, with the target of making the recurring business contribute c.40%-60% of profits in the next 3-5 years. Other jobs eyed include highways such as KIDEX, DASH and SUKE and building jobs such as Ikano. That said, earnings are expected to be soft for the next 3-4 quarters, with the projected commercial operation date for its first unit of the 4 x 360MW coal-fired still kept at end-2014 but earnings will probably start to kick in meaningfully by 1H2015 (with all units fired up) which we believe will shore up the weak earnings performance currently. All told, our earnings estimates are adjusted downwards to account for the margin squeeze with FY14-FY15 earnings lowered by 25% to 41%

Maintain Neutral. Until earnings start to show signs of recovery, we believe our PER-based valuation will not be an appropriate valuation metric for now, given the volatility of its construction earnings. Hence, we cut Mudajaya‟s fair value to RM2.25 (from RM2.55), which is now pegged on parity to its NTA. Job wins which are expected in the next few months might create buying interest but earnings, at least in the next 3-4 quarters would mean stock performance will be capped near term in our view. We believe Mudajaya is fairly valued for now.

Source: PublicInvest Research - 27 Aug 2014