Some thoughts on Mudajaya after SC's letter

Reply to Moolah's post on Mudajaya:

"Investment of associates should be the IPP project in India :) The money earned from the construction of the project is plowed back into the IPP project as part of its 26% equity stake commitment. So, can't really say there's no wealth creation as Mudajaya is bound to reap its harvest from India once the IPP starts operation. The question is whether the earnings from IPP could justify the RM871 million being plowed into the IPP project. Mudajaya will be putting another RM671 million over the next two years into investment of associates. That will equal about RM80 mil per quarter.

As for valuation of Mudajaya, I will not put its construction earnings from IPP together with its 26% stake in IPP like what is done by CIMB. Instead, valuation should only include its 26% stake in IPP and exclude its earnings from IPP construction as construction profits are channeled back to the IPP anyway. By excluding IPP construction earnings, its earnings should be halved, probably about RM140-160m p.a. in 2011-12.

Simple valuation: RM1800m (Construction earnings PER 12x) + RM800m 26% stake in IPP + RM30m properties. Work out to be RM6.40 per share. Hope this helps :)"

Looking closer at Mudajaya's financial statements, its earnings are not really that meaningful (except for other projects other than IPP projects). However, the way they present their earnings were misleading to investors. This episode has also caused a dent in investors' confidence towards this company and will be hard for the company to shake off its "fraudulent company' image among investors.

Price weakness to continue??

Any constructive comments on Mudajaya? Appreciate it!

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Stock Holdings

Current stock holdings for now (I find 5 stocks for a portfolio will be good enough for individual investors. Holding more than that could undermine potential gains. I guess an investor's aim is to train oneself to identify winning stocks while at the same time train oneself to be intuitive/alert enough to sense any negative sentiment and change fast, and I mean REAL FAST accordingly - I've learnt some difficult lessons of not acting fast enough, especially in cutting losses and switch counters fast):

Delloyd (RM3.14): I feel it's a matter of time before it flies. I like their share buybacks, increasing contribution from bus manufacturing, plantation and riding on increasing car sales. An extensive report on Delloyd can be found here in The Edge. Click here for previous posts.

Mudajaya (RM4.61): Ample opportunities to pick up Mudajaya at lower prices, though it can be risky pending announcements from SC regarding its disclosures on Indian IPP projects. However, looking at how Mudajaya came out to clarify and assure the investors/analysts coupled with working closely with SC as compared to other more dubious companies where CEOs go missing and so on, Mudajaya should be alright in this regard. In addition, "double joy" on announcements of potential IPP project in Laos and SC's email on letting Mudajaya off within a single day. Click here for previous posts.

Paramount (RM4.63): Same old story on Jerneh. Potential fat dividend on the cards? Business direction good as well with greater expansion/diversification into education sector while corporate earnings in the past quarter came out very favorable. Click here for previous post.

QSR-WB (RM2.07): More speculative. Looking at how the shares have been played up, a very big player is coming in. Recent news have been favorable such as expansion into India, potential acquisition of Yum!'s outlets and the resilient uptrend of its earnings. A good proxy to KFC which has shot up to the sky!! QSR currently trades at around 14.5x PER which is undemanding as it should trade close to other F&B counters which are at 17-18x PE levels in view of its leadership in the F&B sector. Should QSR goes up to RM5.50, QSR-WB could easily go up to RM2.50, more than 20% upside.

Latexx (RM2.72): As mentioned in the previous post.

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

A wave of privatisations coming to Malaysian shores: Who's next?? Featuring EPIC, AZRB, TDM, Paramount and CSC Steel

There have been quite a number of privatisation of listed companies in Malaysia. Among the companies being privatised or in the progress of doing so since late last year are:

1. Tanjong Plc
2. Measat
3. Astro
4. M3nergy
5. Malaysian Mosaics Bhd
6. Kretam
7. New Straits Times
8. Southern Steel
9. Titan Chemicals
10. Hume Industries

The latest candidate is EPIC (RM2.11) as reported in TheEdge Weekly, citing possible reasons of undervaluation and not being appreciated by the market. The takeover price remains unknown. However, the privatisation must have a much higher takeover price than current stock price to go through especially with AZRB holding 20.97% equity stake in EPIC. To recap, AZRB purchased the shares at RM2.40 per share in Oct 2007. It will be hard for AZRB to let go of the shares if the takeover price is not more than RM2.40. Incorporating AZRB's holding costs (AZRB incurred borrowing costs to purchase EPIC) of about 15% (Assuming 3 years at 5% p.a. interest rate), takeover price has to be RM2.76 to enable AZRB to breakeven for its venture into EPIC.

In addition, at RM2.40, PER is undemanding at around 8x-9x for FY2010-11 earnings. Having said that, book value is at RM2.04 with P/BV at 1.03x at current price of RM2.11. As at end June 2010, EPIC has a net cash of RM66mil or 39 sen per share. Terengganu Inc might need to fork out another RM244-305 mil (assuming takeover price of between RM2.40-3.00) to purchase 101.8 million shares of EPIC which are not owned by it. Anyway, I think the takeover price shouldn't be based on book value but more on PER due to its consistent earnings. By attaching PER of 10x, takeover price could be in the range of RM2.80-RM3.00. Will the takeover price be this high? I'm only guessing.

What are the companies which could be privatisation targets? I still feel there are quite a number of undervalued stocks which have been lying low for a long time and not being appreciated by the market. There are still some companies with stable businesses and strong balance sheets which are still trading at PE of less than 7x. So, maybe we could do ourselves a favor by identifying these potential companies? Stable business, good earnings, cash-rich, low peer valuation etc etc.....

Some companies that came to my mind after reading the EPIC news include TDM, CSC Steel and Paramount. If you have any ideas, don't mind sharing with us :)

TDM (RM2.34): 53.1% owned by Terengganu Inc, same shareholder as EPIC. TDM is also cash-rich with net cash of RM133 mil and trading at ridiculous PE of 6.5x only assuming 2010-11 earnings at RM80 million p.a. Book value is at RM2.97.

CSC Steel (RM1.78): 46% owned by China Steel Asia Pacific Holdings Pte Ltd (Taiwan's largest steelmaker with revenue of up to RM16.5bil). Net cash of RM288 mil and PER of around 7x. Net profit was at RM70-90m over the past 5 years except for 2008, the year which they were still able to make RM59 mil net profit despite the severe downturn in the steel industry. Book value at RM2.17. Will the Taiwanese follow Titan's footsteps?

Paramount (RM4.00): Will be very cash-rich if Jerneh Insurance shares are sold. Net cash of RM140 mil with potential to go up to RM280mil or RM2.40 per share when Jerneh is sold. PER around 7x and earnings have been around RM50-60 mil over the past 5 years. Book value at RM4.87. It is 29% owned by Dato Teo Chiang Quan, a member of the Teo family which controls See Hoy Chan. (Actually I don't see any reason for them to list this company in KLSE as Teo family could probably be one of the richest billionaires in Malaysia and it might be easy for them to take the company private. No one knows how much they are worth as most of their assets remain hidden from the public's view.)

PS: Other companies that I glanced through (Look attractive but not necessarily privatisation targets) include Pintaras Jaya, TRC Synergy, Fajarbaru, Insas, Wellcall, TSM Global, Protasco, Kurnia Setia, Harrisons, Faber, Mudajaya (A lot of uncertainty over SC's probe. Could it be that someone want to drive down Mudajaya's share price to buy more of its shares? Could it be related to the privatisation rumours? Who's the one releasing the 'poison letter' to SC? Insider job? Questions questions and questions???) etc.

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Mudajaya (RM4.10) surged on excellent results!!

Mudajaya just posted its results this evening. Its performance was excellent, even beating my expectations for this year. This year's net profit most likely will exceed RM100mil which translates into 27 sen per share. Consequently, the share price shot up by 22 sen in anticipation of the favorable quarterly results.

Performance: On y-o-y basis, revenue and net profit rose 78% and 337% respectively whereas its net margin rose to 17.7% from 11.8% in 3Q2008 and 14.5% in 2Q2009. On q-o-q basis, revenue increased 9.5% while net profit was up 33.4% due to higher margins. Cumulative wise (9-month ending 3Q2009), revenue and net profit rose 173% y-o-y and 218% y-o-y respectively. The better performance was due to increased revenue contributions from its construction activities.

Prospects: For more info, please click here (my previous post)

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Mudajaya (RM3.60): Another YTL in the making? A real gem among construction stocks

Mudajaya had a really good run-up for the past 3 months, rising from a mere RM1.50 in mid-July to current level of RM3.65, with its stocks transforming into a rather active trading counter from an illiquid and cold one. Mudajaya also starts to make into media's headlines which bodes well for its stocks as more investors realize the growth prospects of this company. I believe there will still be upside to the stock as the recent run-up hasn't fully justify the strong fundamentals and strong growth prospects that this company could offer. Further price triggers include stronger quarterly results (to be announced end Nov'09), projects awards and financial closures for its IPP projects. In addition, further roll-out of big ticket items such as LRT projects, LCCT terminal, double tracking (Gemas-JB), Pahang Selangor Water Transfer etc. could trigger further upward rerating for construction stocks.

From being a small-mid construction company, Mudajaya is slowly transforming itself into the likes of YTL with businesses in construction, properties, concrete manufacturing and trading of building materials while it is also venturing into IPP (Independent Power Producer) projects in India. Bulk of its earnings come from construction, marginally supported by other business segments.

Huge orderbook: Mudajaya's gigantic outstanding orderbook of RM5.4bn even exceeds the big boys' orderbook like IJM and WCT. Out of the RM5.4bn, 60% comes from its EP (Engineering & Procurement) works for its IPP projects in India while the remaining ones are local construction projects. On top of that, Mudajaya has submitted tenders worth a total of RM1.7bn, of which RM800mil is from Malaysia, RM500mil from Saudi Arabia and RM400mil from India. The Company might secure RM600mil from 2-3 project bids locally, potentially bringing its orderbook past RM6bil mark by end-2009. Margins from these new project bids will be favorable as they are negotiated ones with pretax margins potentially reaching mid-to-high teens.

Power play: Mudajaya has made a really good move going into India's power production. In view of India's negative reserve margin and huge power supply shortage coupled with India's tariff rates which could go up from 17 sen/KWh to 50 sen/KWh (Tenaga is 23-38 sen/KWh), Mudajaya stands to benefit from lucrative recurring income with the commencement of IPPs by 2011. In addition, Mudajaya is the only Malaysian contractor recognised by India's National Thermal Power Corporation (NTPC) which could mean less competition in project bids. Owing to India's economic expansion, the Indian government has set a target to increase its power generation by 78,000MW by 2012. Mudajaya's 1,440MW is only a small fraction of the power needs in India. Therefore, more construction of power plants are expected in the pipeline, which could land Mudajaya with more IPP projects.

Earnings: Earnings for the past few quarters were impressive, recording q-o-q increase since Sept 2008, owing to IPPs projects and high margin projects kicking into higher gear. Quarterly net profits rose to above RM25mil mark as compared to historical average of RM10-15mil a year earlier. With most of its orderbook slated to complete by 2012 (RM5.4bil), assuming no replenishment of orderbook which is highly unlikely, revenue has to reach RM1.8bil p.a. in FY2010-12, a massive increase from its revenue of RM422.4mil in 2008 and estimated RM1bil in 2009. Quarterly net margins have been in the range of low-mid teens, thus for conservative sake, we'll assume 10% net margin which could translate into net profit of RM180mil, equivalent of 48.2 sen per share. Note that this earnings forecast has not taken into account potential recurring income coming from its IPPs.

Valuation: Assuming 48.2 sen per share for FY2010-12, PER will be at 7.6x only, a huge discount to its peers' average PER of 15x. Mudajaya is also supported by strong balance sheet with cash pile of RM141mil and ZERO borrowings which is extremely rare for construction stocks, indicating Mudajaya's strong management. In conclusion, Mudajaya's stock remains a cheap entry to the construction sector. By simply attaching PER of 12x, Mudajaya's stock should go past RM5.00. (Hahaha..I have a feeling that I'm analyzing Supermax, similar EPS, PER, current price & target price)

Notable Ongoing Projects:

Malaysia:

1. Batu Kawah Township, Kuching : RM93mil

2. KL-Kuala Selangor Expressway : RM693mil

3. Crest Service Apt/Office Block, KL : RM129mil

4. Pahang Housing - Felda : RM900mil

5. Kuantan Housing : RM141mil

6. Pahang Hospital : RM75mil

7. KLIA Spur Line : RM39mil

8. RA Damansara Housing : RM24mil

India:

1. Rehab & upgrade of road works, Chhattisgarh : RM19mil

2. EP works for IPP Phase 1, Chhattisgarh : RM635mil

3. EP works for IPP Phase 2, Chhattisgarh : RM2,640mil

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.