This article first appeared in The Edge Financial Daily on February 6, 2018
JAKS Resources Bhd
(Feb 5, RM1.84)
Maintain neutral with a higher fair value (FV) of RM1.75: JAKS Resources Bhd, together with China Power Engineering Consulting Group Co Ltd (CPECC), is building a 1,200 megawatt (mw) coal-fired power plant in Hai Duong province, Vietnam. Works commenced in the second quarter of 2016 (2Q16), with the first phase to be completed by 2020. The joint venture (JV) company has also secured US$1.4 billion (RM5.46 billion) in financing, or 75% of project costs. As reported earlier, we expect its near-term earnings to be underpinned by its RM1.6 billion Vietnam engineering, procurement and construction (EPC) contract and other local jobs such as the Sungai Besi-Ulu Kelang Elevated Expressway (SUKE), while recurring income from its power plant will kick in by 2020.
The 200ha site for the power plant, which is located about two-and-a-half hours away from Hanoi Airport, is progressing well with Phase 1 expected to be completed by 3Q20. We are pleasantly surprised by the condition of the site which appears to be systematically organised and connected by a highway that was just completed last year. Also, we understand that the manufacturing of the machinery and equipment (M&E) is on track to be completed by this year. Currently, the equipment is being manufactured in China.
JAKS’ management believes that it can leverage on its track record in Vietnam to explore more power-related jobs in the country. We understand that it could expand its footprint into other provinces in Vietnam with eyes on the renewable energy segment. That said, renewable energy is still at the nascent stages in Vietnam due to prohibitive high costs and unconducive weather for wind and solar power in certain areas. The potential is attractive, nonetheless, given state-owned power company Electricity of Vietnam’s (EVN) plans to venture into solar-powered projects in view of the annual 10%-to-15% increase in domestic demand for power.
According to Vietnam Investment Review, EVN has the mandate to support the development of solar-powered projects and is “responsible for buying all electric output from on-grid solar-powered projects at a feed-in-tariff of 9.35 US cents (36.47 sen) per kilowatt hour”. Power spending in Vietnam is expected to be at US$123.8 billion on EVNs estimates, to develop the country’s power system within the next 20 years. Hence, power spending is expected to average about USS6.8 billion per annum. All in, Vietnam plans to invest in up to 98 power plants with a total capacity of 59,444mw. This presents an immense opportunity for the JAKS group, in our view, to become one of the meaningful power plant owners in Vietnam if it can deliver its maiden power plant project successfully.
More importantly, it can also potentially work with its current partner, CPECC, which is the wholly-owned subsidiary of China Energy Engineering Corp (CEEC), which is, in turn, controlled by state-owned power conglomerate China Energy Engineering Group Co. As reported earlier, this conglomerate is engaged in the design and construction of power plants, with projects across China and in more than 80 countries overseas. It also has businesses in equipment manufacturing, explosives and cement production and investments in power projects. Notable projects, among others, include the construction of the Three Gorges Project in Central China’s Sichuan province and a nuclear-power project in Guangxi province. As for the coal-fired power plant, it actually had built a similar twice a 600mw power plant in Vinh Tan, Vietnam.
Last year, the group announced land sales amounting to about RM194 million. To recap, it disposed of its 14.8-acre (5.99ha) land at USJ 1, Subang Jaya for RM167.6 million and another land measuring about three acres for RM25.9 million. This, in our view, is positive and would raise the necessary capital, especially, for its projects in Malaysia. As for the Evolve Concept Mall, we now understand that the group will focus on improving the occupancy rate. Currently, we understand that the occupancy rate stands at 65%. Admittedly, the timing for the disposal of the mall is uncertain now given the current soft property market. While disappointing, we take comfort in the knowledge that the management is taking steps to rationalise its other assets as evident by the land disposals. Elsewhere, the ongoing Pacific Star project is expected to be handed over by phases starting from mid-2018.
The outstanding order book is estimated at RM2.4 billion, which should underpin its earnings for the next two to three years. The EPC contract for the Vietnam plant alone is estimated at RM1.59 billion, with the other key contract being the SUKE job (RM477 million contract value). — PublicInvest Research, Feb 5