This article first appeared in The Edge Malaysia Weekly on August 28, 2017 - September 3, 2017

LAST month, Tadmax Resources Bhd passed a major milestone in the development of its 1,200mw combined cycle gas turbine (CCGT) power plant project — submitting a detailed feasibility study, proof of land ownership and a banker’s cheque for RM10 million.

On the one hand, this is a reassuring sign for shareholders that the company, with no previous track record in developing power plants, is still on course to deliver the estimated RM3 billion project.

However, the project is still at least half a decade away from contributing to Tadmax’s bottom line. So, while waiting for this catalyst, shareholders may have to focus on the group’s property projects instead.

According to industry executives familiar with the project, the commercial operation date (COD) for Tadmax’s plant is in 2023. That is a long way off, considering it typically takes only 36 months to build a CCGT power plant.

“The first phase of the power plant (600mw) is due in mid-2022. The second phase is due beginning 2023. So it is only about five years away,” says one executive familiar with the matter.

The distant COD is simply a result of the Energy Commission’s (EC) scheduling of incoming power plant projects. SIPP Energy Sdn Bhd, a company linked to the sultan of Johor, has 1,440mw due in 2020. Edra Global Energy Bhd has 2,242.13mw due in 2021.

Based on the 2023 COD, Tadmax has roughly a two-year window to begin construction. But this does not mean the company is sitting idle. Channel checks reveal that the group is actively engaging banks and potential partners to finance the project. This is probably the most crucial step in developing the plant.

When contacted, Tadmax’s management declined to comment.

It is worth noting that Tadmax’s balance sheet only had RM10.6 million in cash against RM49.8 million in borrowings as at March 31. The group’s closing share price of 39.5 sen apiece last week gives it a market capitalisation of only RM209.88 million.

When Tadmax announces its results later this week, the group’s balance sheet is expected to look a little stronger. Recall that Tadmax in May raised RM20.06 million via a 10% private placement that was taken up by Datuk Kok Boon Kiat (8%) and Datuk Elias Abdullah Ng (2%).

Of this amount, roughly RM10 million would have been used by the group for the banker’s cheque, in place of a commitment bond, for the power project.

In addition, Tadmax has proposed a two-for-five rights issue of up to 219.34 million shares. The rights issue comes with seven free warrants for every four rights shares subscribed. Based on the proposed issuance price of 40 sen per share, the rights would raise up to RM88 million.

Regardless, this still leaves the group a little light on capital to fund the power plant. Such projects are typically funded 80:20 debt to equity.

Assuming the cost remains stable at RM3 billion over the next two years, 20% equity would amount to RM600 million. If the rights issuance is successful, Tadmax would have about RM110 million in cash in the best-case scenario — only 3.7% of the cost of the project.

On a side note, recall that Tadmax’s former deputy chairman and managing director has agreed to an irrevocable undertaking to subscribe to at least 71 million rights shares, including up to 41.5 million additional rights shares in the event of undersubscription. Meanwhile, managing director Datuk Seri Anuar Adam has committed to subscribe for his entitlement of 54 million rights shares.

In short, the cash call should raise at least RM50 million. The trouble is, the bulk of the funds raised from the rights issue will be used to settle borrowings and to fund the group’s property development business.

So, how will Tadmax fund the power plant?

“Once you have a PPA (power purchase agreement), you can borrow at fairly reasonable rates. As long as the debt is ring-fenced to the project, you will get a decent rating — at least AA-,” says one executive.

Excessive borrowings, however, could consume most of the cash flow, leaving minimal earnings as dividends for Tadmax’s shareholders.

Thus, Tadmax is understood to be exploring other options, including ones that involve strategic partners.

Of course, the groundwork that Tadmax is doing may be in vain if the COD is so distant.

“Even if the banks are willing to lend, it would only be valid for about six months or so. Potential partners will not commit either. A lot can change in two years, forex rates, for example, could move unfavourably,” one industry veteran says.

That said, there could be an upside to the situation.

“If Tadmax can show proof that it has everything ready to go, that it is capable, perhaps the COD could be brought forward,” he says.

Of course, this is at the discretion of the EC.

For the time being at least, investors will have to be patient if they hope to reap the benefits of the project. In that case, what would be the reason to subscribe for the rights issue? In short, it would have to be the group’s property arm.

This year, Tadmax had modest success with the launch of Mizumi Residences in Kepong Metropolitan Lake. The first two blocks of the development, consisting of 1,050 units, have enjoyed an 80% take-up rate. In addition, the group has launched the third block, which has secured an estimated take-up rate of 50%.

The group’s property arm is spearheaded by Datuk Gan Seong Lam, who is also the managing director of his own development company — Maxim Holdings Sdn Bhd.

Other than Mizumi, Tadmax has also launched a property development in Labuan. While selling prices are lower in the tax haven, it is understood that sales have been brisk due to the limited supply of property on the island.

Tadmax’s property arm is expected to begin contributing positively to the group’s bottom line in the third quarter as it transits from the high one-off start-up costs incurred earlier this year and profit recognition begins. In fact, the group’s second-quarter earnings are expected to begin reflecting this change.

Tadmax’s management has previously guided that Mizumi Residences alone is expected to contribute about RM200 million in profit over five to six years.

In summary, investors are better off assessing Tadmax’s property division as the short and medium-term driver of earnings while waiting for the power project to kick off.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.