This article first appeared in The Edge Malaysia Weekly on April 17, 2017 - April 23, 2017

MUDAJAYA Group Bhd’s share price has been buoyed by positive news flow. The stock surged 47.56% to a seven-month high of RM1.21 on April 6, from 82 sen at the beginning of last month. One of the key catalysts is the long-anticipated commencement of power sales from the first of its four generating units in Chhattisgarh, India.

The units, with a capacity of 360mw each, make up Mudajaya’s independent power producer (IPP) project in India, undertaken via its 26% associate RKM Powergen Pte Ltd, which had been delayed since 2013.

Unit 1 will supply 200mw to power distribution companies in Uttar Pradesh from this month.

“It is a big step for us. We are trying to push the power purchase agreements (PPAs) for the remaining units,” group managing director and CEO James Wong Tet Foh tells The Edge in an interview.

He says, the remaining 150mw from Unit 1 is still pending approval from Indian distributor Uttar Pradesh Power Corp Ltd, which is expected to take two to three months. The all-in tariff for unit one is about INR4.35 per kWh.

Wong expects Unit 2 to start selling power to merchants by the middle of this year. Although the merchant power rates are lower, he expects the tariff to increase to INR3.5 per kWh during summer in India, which would help cover the power plant cost.

As for Units 3 and 4, which are expected to be completed by the end of this year, Wong says the group is still negotiating and finalising the PPA. The group is targeting to get the commercial operating date for these units next year.

Assuming all four units are operating, the group is looking at earnings contribution of RM100 million annually, or RM25 million per unit per year.

Wong does not expect further delays for Units 3 and 4 as the main lender has continued to show support for the power plant. “Most of the equipment is there, the physical status of the two units is 95% and 60% done, and once the money is in place, the construction progress is fast,” he says.

However, he does not expect a turnaround soon as the contribution from the IPP is not enough to offset the depreciation cost for the power asset due to the prolonged delay.

Recall that Mudajaya took up a 26% stake in RKM Powergen — a joint venture with India’s RK Powergen Pvt Ltd — to undertake the construction of the power plant in Chhattisgarh. The commissioning of the plant was initially planned for 2013, but it missed several deadlines owing to a series of problems, including securing coal supply and transporting the fuel, construction delays, synchronising the power and renegotiation of the PPA.

Based on the latest estimates provided by RKM Powergen, the total project cost has exceeded the original cost of INR6,700 crore (about RM5 billion). Wong declined to reveal the latest estimates as the final cost can only be determined upon completion of Units 3 and 4, and Mudajaya is still in discussion with the banks to restructure the loan for the construction of the plant.

Based on the latest management accounts provided by RKM Powergen, Wong says the group’s 26% share of the depreciation and interest charges for the third and fourth units are about RM10 million per month at the current foreign exchange rate.

For the financial year ended Dec 31, 2016 (FY2016), Mudajaya booked a non-cash adjustment of RM133.29 million for the two units. This, in addition to the allowance for the impairment of trade receivables and other current assets, has led to a wider net loss of RM264.9 million for the group, compared with RM1.43 million in FY2015.

“Without power sales commencement from both units in 1QFY2017, these non-cash accounting items will continue to impact the group,” Wong says, adding that if the other units can start to sell power this year, the associate may able to register a small profit.

Nevertheless, Mudajaya has not given up on disposing of the Indian power plant after 11 difficult years of construction. According to Wong, the valuation is not attractive as the power plant is only partly completed. Nevertheless, management hopes at the end of this year, when all the units’ PPAs are wrapped up, it can fetch a better price.

The delay caused Mudajaya to slip into the red — for the first time since it was listed on Bursa Malaysia in 2004 — with a net loss of RM70.2 million in FY2014.

But despite the progress seen at the Indian power plant, execution and policy risks remain while the impact on construction cost due to the prolonged delay is viewed by analysts as a concern.

“The commencement of power sales will be a potential catalyst for the group’s loss-making operation. But it will take some time to be certain because it is just a part of the power plant, not the full supply of all units,” Affin Hwang Capital senior associate director Loong Chee Wei tells The Edge.

He believes the commencement of power sales shows that Mudajaya has finally come out of its trough but investors keen on the stock will need to be of aware of the policy and execution risks related to the power plant.

Another analyst points out that RKM Powergen’s losses surged to RM133.29 million from RM12.28 million in FY2015 based on the group’s FY2016 results. He also raises concerns over the group’s impairment of financial assets, which spiked to RM121.27 million in FY2016 from RM3.22 million in FY2015.

“These are not small sums. It seems to me that there are still a lot of outstanding issues in the company,” he tells The Edge.

Apart from the Indian power plant, a significant impairment incurred in FY2016 was for the RM98 million Manjung project, following an unfavourable decision under the Construction Industry Payment and Adjudication Act 2012, according to Wong.

Mudajaya Corp Bhd had sought an adjudication for more than RM175 million in claims from CMC Machipex Sdn Bhd in October 2015. CMC Machipex appointed Mudajaya as a subcontractor to design and construct the Manjung power plant.

“This is one of the historical legacy projects and we are cleaning it up,” Wong says, adding that the group is still in negotiations to resolve the matter.

He concedes that there are legacy issues that need to resolved, such as the cost overruns in the construction of the Mass Rapid Transit Line 1, which Mudajaya hopes will be settled by FY2018.

As at March 31 last year, the group’s outstanding order book for the construction segment stood at RM2.2 billion, which is expected to sustain earnings visibility for four years. The average margin for these projects is 10%, according to Wong. He adds that the group is bidding for contracts worth at least RM5 billion, and its historical success rate is 15%.

Last month, Mudajaya signed a 21-year PPA with Tenaga Nasional Bhd, to build a large-scale, 49mw photovoltaic plant in Sungai Siput, Perak, on a build-own-operate basis.

Wong is looking at an internal rate of return in the high single digits from the project, but he expects significant earnings contribution from this project only next year, based on a rate of 41 sen per kWh.

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.