Sunday, 2 August 2015

Mudajaya (1)

How I Feel About The Group

Publish date: Thu, 6 Mar 2014, 10:46 AM 

Mudajaya has attracted some attention recently. Market talks is that they are in good position to secure contracts from 1MDB.  One of our honoured guest here, Mr Koon, has come up with his blog posting to discuss the company.  Mudajaya is a company he is very familiar with, so it makes sense to put his $$$$$ there (quote : Warren buffet).

One of the strong reason for investing in Mudajaya is that they are about to commission their power plant in India and there will be quantum leap in earnings over next few yeas.  As somebody who has been trained in science all my life, I always like to double check what other people told me by putting some figures into the concept.

(1) contribution from Indian power project :  information is scarce as PLC usually don't make it available to small investors like us.  A quick check of various analyst reports showed that both RHB and CIMB analysts expect the project to contribute approximately RM80m earnings (net profit, I persumed).
Mudajaya made about RM150m in 2013.  According to RHB, the Indian project will bump up profit to RM220m next year, representing 33% of the profit in 2014.  This is not exactly the kind of contribution that warrants a screaming buy (relatively less impactful compared to my pet project Ivory Properties, which upon Penang World City coming into full force, has potential to propel earnings from RM20m to RM100m.  I am working on the propaganda piece, watch this space).
But but but... please dont press the sell button for Mudajaya yet...hold on to your horses, I will say more about this in the conclusion section.

(2) sensitivty to India Rupee movement : In August 2013, there was big fluctuation in emerging market currencies sending us all running for cover.  As the memory is still fresh, every time when somebody told me there will be major earning contribution from overseas, the first thing I do is to evaluate the exposure and potential downside.  I did a quick check, Rupee weakened from 16 to 20 (vs Ringgit) over a period of 6 months, a change of 20%.  Based on assumption of  the India project RM80m earnings contribution, a 20% weakening of Rupee will result in earnings declining to RM64m, a mere RM16m drop compared to group expected earnings of RM220m (about 10%)  I breath a sigh of relief.  It seemed that I need not worry too much about the unhedged currency exposure

(3) 1MDB project :  Mudajaya has good chance to participate in the RM11 billion project as they advised 1MDB at consultancy stage.  That is what people said, let's assume it is true (very likely is true)

(4)  squeaky clean balance sheet :  Mudajaya has zero gearing.  How should you interprete this ? For the conservatives, this is a demonstration of financial resilience.  For the progressives, this points to a direction of additional profit potential.  Mudajaya seemed to realize that they are not working their balance sheet hard enough. Recently, they laucnhed a bond programme that allowed them to raise RM1 billion.   About RM200m has been earmarked for wind power projects, etc.  Let's once again put some figures into the concept.  Let's assume that they draw down RM300m to buy some land banks.  With their many years of contracting expereince, venturing into property development (in a big way) is a no brainer.  Assuming that the land generate 6 times GDV (Ivory land cost is RM1 billion, but GDV is RM10 billion.  So I am being conservative here), total GDV is RM1.8 billion. Spread over five years, GDV per annum of RM360m.  Based on 15% net margin,  additional net profit of RM50m ?

Conclusion : short term re-rating would come from the India project.  Contribution not really that siesmic but not something to be scoffed at as well. Looking at it from capital preservation point of view, the incoming profit makes Mudajaya a defensive play, protecting it from downside by a 33% safety margin.  Ability to secure contracts from 1MDB will decisively re-rate the stock (which I think they are likely to get).  Gearing up balance sheet going forward sustainably will unlock earnings potential of RM50m to RM100m.  Put all these together might result in earnings decisively crossing RM300m within three years. I will leave it to you to ascribe the PE multiple and your own valuation.
To cut the story short, I dont mind taking some position, patiently wait for three years for 50% to 70% potential capital gain

Have a nice day

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