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Please read carefully the important disclosures at the end of this publication. This report has been prepared by CIMB for the CMDF-Bursa Research scheme. U PDATE REPORT CIMB Research Report 23 April 2012 R ECOM Buy Mudajaya P RICE RM2.61 Don’t get cold feet over coal supply M KT C APITALISATION RM1,431.7m B OARD Main S ECTOR Construction I NDEX C OMPONENT FTSE EmasMDJ MK / MJYA.KL Sharizan Rosely + 60 (3) 2084-9864 –
[email protected] Investment highlights ã Maintain Buy and RM3.45 target price. Recent worries over the coal supplyagreement for Mudajaya’s Indian IPP are unjustified as the fuel supply agreement islikely to be inked soon and the full cost pass-through (FCPT) mechanism is intact.We continue to value the stock at a 40% discount to RNAV. We like Mudajaya for itsdomestic order book replenishment prospects and recurring income from its IndianIPP starting in FY13. We maintain our trading-oriented Buy recommendation andRM3.45 target price (40% RNAV discount) given the likelihood of project wins in thenear term. ã Management addresses concerns on coal supply for Indian IPP. We contactedmanagement for clarification on recent concerns over coal supply for the Indian IPP.The concerns were triggered by news that Coal India Ltd (CIL), which will supplycoal to new-generation power producers in India, may negotiate a lower penalty if itdoes not fully comply with the fuel supply agreement (FSA). The FSA should beformalised soon and will guarantee adequate coal supply for the incoming IPP's. ã Concerns are unjustified. We think that the concerns are unjustified as the FSA isbacked by India’s coal-linkage policy that ensures coal supply for future IPPs. Under the coal linkage, coal cost is pegged to US$30-40/tonne, much lower than themarket price of US$105/tonne. Mudajaya's 26% associate RKM Powergen has aPPA to supply 1,440MW of power in the state of Chhattisgarh. The power plant(4x360MW) requires 6m tonnes of coal p.a. Additional supply of coal is also backedby a coal mining rights/coal block for 99m tonnes of coal. Also, likely fluctuations incoal cost will be fully covered by the FCPT mechanism which is still intact. ã Accumulate on weakness . This should clear the air and may trigger a share pricerecovery. Investors should accumulate on weakness. The stock is down 18% fromits 14 Mar high of RM3.20. Its CY12-13 P/Es of 4-5x are the cheapest in our construction universe. Key stock statistics Per share data FYE Dec20112012F EPS (sen)42.1 49.0P/E (x)6.2 5.3Dividend/Share (sen)10.8 11.5NTA/Share (RM)1.73 2.18Book Value/Share (RM)1.74 2.18Issued Capital (m shares)548.3 548.352-weeks Share Price Range (RM)RM2.4 / RM4.57 Major Shareholders:% Dataran Sentral (M) Sdn Bhd24.3Mulpha Infrastructure Holdings Sdn Bhd22.0Brahmal Vasudevan5.8 FYE Dec2009201020112012F Book Value (RM)0.68 1.32 1.73 2.18Cash Flow (sen)22.0 39.7 43.2 49.8Earnings (sen)21.3 39.3 42.1 49.0Dividend (sen)3.7 5.6 10.8 11.5Payout Ratio (%)13%10%19%17%P/E (x)12.2 6.6 6.2 5.3P/Cash Flow (x)11.9 6.6 6.0 5.2P/Book Value (x)3.8 2.0 1.5 1.2Dividend Yield (%)1.4 2.1 4.1 4.4ROE (%)14.0 21.3 25.8 25.1Net Gearing (%)net cashnet cashnet cashnet cash Source: Company, CIMB estimates, Bloomberg [ 2 ] Recent developments Concerns on Indian IPP coal supply addressed . We contacted management for clarification on recent concerns over coal supply for the Indian IPP. The concernswere triggered by news that Coal India Ltd (CIL), which will supply coal to new-generation power producers in India, may negotiate a lower penalty if it does not fullycomply with the fuel supply agreement (FSA). Mudajaya told us that the FSA shouldbe formalised soon and will guarantee adequate coal supply for the incoming IPP's. PPA is still intact; concerns are unjustified . We think that the concerns areunjustified as the FSA is backed by India’s coal-linkage policy that ensures coalsupply for future IPPs. Under the coal linkage, coal cost is pegged to US$30-40/tonne,much lower than the market price of US$105/tonne. Mudajaya's 26% associate RKMPowergen has a PPA to supply 1,440MW of power in the state of Chhattisgarh. Thepower plant (4x360MW) requires 6m tonnes of coal p.a. Additional supply of coal isalso backed by a coal mining rights/coal block for 99m tonnes of coal. Also, likelyfluctuations in coal cost will be fully covered by the FCPT mechanism which is stillintact. This means that the PPA to supply power at around Rs2-2.3/kWh (15-22sen/kWh) will be adjusted for swings in coal cost. Highlights from Edge Weekly . Over the weekend, The Edge Weekly also featuredan article in which Mudajaya’s MD Anto Joseph provided clarification on the coalsupply for the Indian IPP. The article also listed several examples of “policy flip-flops”by the Indian government, i.e. the ban on cotton exports, cancellation of telecomlicences, revocation of approvals for foreign supermarkets and suspension of SouthKorean steelmaker Posco’s plans to build a US$12bn (RM36.8bn) steel mill in India.The highlights of the article are:(i) The potential lowering of the contract penalty from 10% to 0.01% for CIL is not aconcern as the Indian government would still want to ensure the IPPs get a stablesupply of coal to generate electricity. This is because the clause will come into effectthree years after the signing of the FSAs. CIL will sign an FSA with RKM Powergenand 17 other IPPs in a matter of days. The FSAs may impact power plants that comeonstream after 2014/15. Anto said, “They may have difficulty getting coal supply butnot us.”(ii) CIL is also facing pressure from the opposition government, which claims that thehuge discount attached to the prices of coal contracted to the IPPs translates into aloss of more than Rs10tr (RM589m) in national income. CIL, which is 90% owned bythe Indian government, contributed c.90% of coal production in India.(iii) Anto added that there is no need to be concerned about huge provisions for RKMPowergen as the project is on track to come onstream by end-2012 with thecommissioning of the first 360MW unit. The 75% debt portion of the project is backedby state-controlled Indian banks.(iv) He said, “In conclusion, the stakes are too high for power projects like RKMPowergen’s to fall through, more so when the Indian government has an interest in theIPPs. It is in the interest of the Indian government that the country has sufficient power supply. The country cannot grow without power. If CIL does not supply coal, the Indiangovernment, banks and the offtakers, which are also the government, would beaffected. There may be some level of risk but to think that the Indian governmentwould default on every level is just too far-fetched.” Figure 1: P&L analysis (RM m) FYE Dec2009201020112012F Revenue1,347.1 870.4 1,875.8 2,137.2Operating Profit (EBIT)298.7 275.9 383.8 376.7Depreciation(1.1)(2.6)(2.9)(2.9)Interest Expenses0.0 0.0 0.0 0.0Pretax Profit293.9 278.4 413.8 523.3 Effective Tax Rate (%)18.4 14.9 17.0 17.0 Net Profit231.0 215.5 321.1 372.4 Operating Margin (%)22.2 31.7 20.5 17.6 Pretax Margin (%)21.8 32.0 22.1 24.5 Net Margin (%)17.2 24.8 17.1 17.4 Source: Company, CIMB estimates [ 3 ] Recommendation Maintain Buy and RM3.45 target price. Recent worries over the coal supplyagreement for Mudajaya’s Indian IPP are unjustified as the fuel supply agreement willbe inked soon and the full cost pass-through (FCPT) mechanism is intact. Wecontinue to value the stock at a 40% discount to RNAV. We like Mudajaya for itsdomestic order book replenishment prospects and recurring income from its IndianIPP starting in FY13. Overall, our checks with management and the highlights fromEdge Weekly should clear the air and may trigger a share price recovery. Investorsshould accumulate on weakness. The stock is down 18% from its 14 Mar high of RM3.20. Its CY12-13 P/Es of 4-5x are the cheapest among our construction stocks.We maintain our trading-oriented Buy recommendation and RM3.45 target price (40%RNAV discount) given the likelihood of project wins in the near term. Figure 2: Share price chart (RM) 1.502.002.503.003.504.00 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Source: Bloomberg Financial summary FYE Dec201020112012F2013F2014F Revenue (RM m)869.41,347.11,584.21,875.82,137.2 EBITDA (RM m)284.1298.7344.7383.8376.7 EBITDA margins (%)32.722.221.820.517.6 Pretax profit (RM m)278.4293.9342.7413.8523.3 Net profit (RM m)215.6231.0268.9321.1372.4 EPS (sen)39.342.149.058.667.9 EPS growth (%)+84%+7%+16%+19%+16%P/E (x)6.66.25.34.53.8 Gross DPS (sen)5.610.811.512.212.8 Dividend yield (%)2.14.14.44.74.9 P/NTA (x)2.01.51.21.00.8 ROE (%)21%26%25%24%22%Net cash per share (RM)0.460.280.290.480.60 P/CF (x)6.66.05.24.96.2 EV/EBITDA (x)4.44.53.93.23.1 % change in EPS estimates -0.0%0.0%0.0%CIMB/Consensus (x)1.101.061.02 Source: Company, CIMB Research, Bloomberg Estimates [ 4 ] Figure 3: RNAV ConcessionDCF valueStakeValue(RM m)(%)(RM m) IPP RKM Powergen, India (1,440 MW, 20 year DCF @29% WACC)1,989.226%517.2 Other segmentsP/EValueStakeValue(x)RM m(%)(RM m) Construction FY14 net profit13.0151.5100%1,969.5Manufacturing FY14 net profit10.44.4100%45.9 Property m Sq ftRM psfStakeValue(%)(RM m) Jalan Bukit Ledang - Damansara Heights0.07200.0100%13.1Commercial land in Mutiara Damansara (For HQ)0.04150.0100%6.5Net current assets less property development cost (As at 4QFY11)448.3Net cash/(debt) 4QFY11154.8 Total RNAV3,155.3 Enlarged no. of shares549.3 RNAV/share (RM)5.74 RNAV discount40% TP (RM)3.45 Source: Company, CIMB estimates
