GUNUNG CAPITAL BHD has come under the spotlight for the wrong reason. Its share price took a dive when Prime Minister Datuk Seri Najib Razak announced that the National Service (NS) programme would be deferred as part of the revisions to Budget 2015. The revisions would save RM5.5 billion in public operating expenditure.

 This happened barely one month after Gunung (fundamental: 3.0; valuation: 0.6) secured a contract to provide bus services for the NS programme.

The RM164.95 million contract was for a three-year duration up to December 2017, comprising three NS batches for three months each per year. This is an extension of a five-year chartering contract that ended in December 2014.

The deferment of the 2015 NS programme means Gunung will have to forgo the income from two batches this year. The first batch, which began in December 2014, will contribute to the group’s earnings this year, executive director Iskandar Ibrahim tells The Edge.

That said, Gunung is expecting its NS transport charter contract to rake in RM14 million to RM16 million per year once it is back on track.

“We expect the Ebitda (earnings before interest, tax, depreciation and amortisation) contribution to Gunung from this new NS contract for FY2016 (financial year-end December) and FY2017 to be about RM14 million to RM16 million annually,” Iskandar says.

For the nine months ended Sept 30, 2014, Gunung posted a net profit of RM11.5 million, similar to FY2013’s RM11.46 million. Revenue dipped marginally to RM63.5 million from RM64.2 million the year before.

Gunung has posted stable earnings in the last few years, relying heavily on government contracts. However, it has set in motion a plan to diversify into hydropower projects since 2013.

Considered uncharted territory for the company, Gunung initiated a joint venture with Perak Hydro Renewable Energy Corp Sdn Bhd (PHREC) for two mini-hydro projects of 10mw each. PHREC is the master and overall developer of mini-hydro plants in Perak, mandated by the state government.

“Under the Water Rights Agreement (WRA) with the state government of Perak, there are an additional 10 viable greenfield sites that have been pre-identified with an installed capacity of about 50mw,” Iskandar explains.

“These sites will be developed under Gunung Hydropower Sdn Bhd — the JV company — in stages, and the timing will depend on the future available quota allocated for renewable energy from small-hydro under the Sustainable Energy Development Authority Malaysia (SEDA).”

Once all the sites have been commissioned, Gunung expects to have a total installed capacity of 245mw. (See table.)

“Every 10mw installed capacity that comes onstream will generate an average of RM15 million to RM17 million annual revenue for 21 years from the sales of energy to Tenaga Nasional Bhd (TNB),” he says.

Iskandar estimates the cost to develop one MW of capacity at RM10 million.

“We expect the commencement of contributions to Gunung’s earnings to start in FY2017/FY2018, and then grow over the remaining 19 to 20 years tenure of the renewable energy power purchase agreements,” he says, noting that each mini-hydro site has its own official commencement date to begin delivery to Tenaga.

But Gunung does not accrue all the earnings as it has different stakes in each mini-hydro project.

Its JV with PHREC is held through 85% equity interest in Pusaka Hijau Sdn Bhd, which in turn owns a 60% stake in PHREC. The remaining 40% is held by MB Inc, the vehicle of the state government.

PHREC holds a 30% stake in each of the mini-hydro projects it owns. Of the 13 (see table), two sites are in partnership with Gunung Hydropower, which holds a stake of 70%.

PHREC has 30% stakes in another six projects with a total 55mw capacity on a build-operate-own basis.

The substantial shareholders of Gunung are Datuk Syed Abu Hussin, who is the company’s CEO, with 16.33%, Erayear Equity Sdn Bhd with 11.79% and Ooi Hock Lai, who has 8.41%.

Gunung’s net assets had grown to RM37.73 million as at September 2014, compared with RM14.2 million as at December 2013. This translates into a net asset value per share of 72.5 sen.

Cash and cash equivalents came to RM18.88 million, not accounting for a finance lease of RM1.1 million and short-term borrowings amounting to RM16.7 million.

The stock closed at 77.5 sen last Thursday, giving the company a market capitalisation of RM109.1 million.

Gunung had initially seen a positive share price reaction to news of the NS charter contract. The share price rose 12% over a month to 84 sen on Jan 19, but it has since lost 7%.

That being said, the share price has stayed fairly range-bound over the last one year, losing some 8% over the course of the year. With a fairly healthy balance sheet and contracts in hand, will Gunung’s prospects brighten?

(Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.)

This article first appeared in The Edge Malaysia Weekly, on February 2 - 8 , 2015.

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