Jaks Resources

Jacks of All Trades, Master of None

Publish date: Mon, 12 May 2014, 09:04 PM 

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The reason I took a look at Jaks is because it is one of the few companies that could potentially benefit from Selangor's water industry restructuring.

Jaks used to be well known for its water pipe manufacturing and trading business. However, as I dug out more and more information about the group, it becomes clear that it is no more a pure water play.

Over the years, the group had diversified into various industries (property development, power generation, etc). In my opinion, many of those ventures are not really well thought out, especially its Vietnam power generation project which requires equity injection amounting to RM800 mil (the Company's market cap now is only RM237 mil). 

Please refer to sections below for further details.

1. Background Information on Jaks

Based on 438 mil shares outstanding and share price of RM0.54, market cap is RM237 mil.

The group has net assets of RM445 mil, loans of RM441 mil and cash of RM100 mil. As such, net gearing is 0.77 times. This is considered quite high, especially if the group doesn't seem to have solid business operations.

For the FYE 31 October 2013, the group reported net profit of RM7 mil. This translates into PE multiple of 34 times.

2. Segmental Breakdown 

As shown in the table below, construction is the largest contributor to revenue and net profit. It also accounts for the bulk of the assets.

Pipes manufacturing and trading only contributed RM0.2 mil net profit and accounts for RM80 mil assets only.

However, going forward, earnings from this division is expected to increase as the group recently secured more than RM600 mil contracts from government. Please refer to section 3 below.

		Pipes &
		building
(RM mil)	Pipes	materials		Investment	Property
FYE Dec 2013	manufacturing	trading	Construction	holding	development
Revenue	21.0	38.0	396.0	0.3	132.0
Net profit	(3.5)	3.7	12.4	(8.8)	3.6
Assets	25.0	56.0	112.0	371.0	685.0

3. Pipe Manufacturing & Trading

On 18 November 2013, the Company announced that it had secured RM237 mil contract for construction of sewerage pipe and other treatment facilities from the govrnment. The contract is for duration of 4 years and target to be completed by November 2017. 

On 24 March 2014, the Company announced that it had secured RM399 mil contract of similar nature from the government. The contract is for duration of 4 years and target to be completed by April 2018.

Due to the RM636 mil contracts secured, the pipe manufacturing and trading division is expected to contribute positively to group earnings over next 4 years. 

4. Property Development

In FY2012, property development only contributed approximately RM1 mil revenue to the group.

However, in March 2013, the Company announced that it has entered into SPA to acquire 51% equity interest in MNH Global Assets Managment Sdn Bhd ("MNH") for RM93 mil cash.

MNH is the devloper for Pacific Place @ Ara Damansara, PJ, Selangor. Pacific Place was launched in 2011 and comprises condominiums, office suites and a 4 level shopping mall. It has GDV of RM942 mil and GDC of RM701 mil. As such, development profit is RM241 mil.

Apart from the mall, which is to be retained as investment property, the bulk of the properties had already been sold and are pending completion. Residual profit will be booked in in 2013 and 2014.

(Note : as part of the project has already been completed / closed to completion when MNH was taken over, JAKS will only be able to book in certain portion of the RM241 mil profit)

5. Landbank

The group has 1 plot of land at Kapar, Klang (23 acres) and 6 plots of land at Damansara, PJ (19 acres).

Those land house the group's factories, warehouses and offices.

There is no information in the annual report regarding the development potential of those land.

However, the 19 acres in Damansara can potentially be very valuable in the event that the group decided to relocate its factories and develop the land.

			area	Description	NBV	Year
			(acres)		(RM mil)
Mukim of Kapar, Klang			23.0	factory / warehouse	18.9	2004
Mukim of Damansara, PJ			19.0	factory / warehouse	50.0	2004

6. Power Project at Vietnam

In January 2012, the group entered into joint venture agreement with Meiya Power, a China based engineering and construction group to undertake a power generation project in Vietnam on 55% : 45% basis.

The project has a concession of 25 years, total construction cost is USD2 billion or RM6 billion, out of which 75% and 25% to be funded by debt and equity respectively (RM4.5 billion and RM1.5 billion respectively).

Jaks is required to inject RM800 mil equity into the project.

The Meiya JV agreement was subseuqently terminated.

In December 2012, the group entered into joint venture agreement with Wuhan Kaidi, another China based construction group, to undertake the Vietnam project based on more or less the same terms and conditions.

In April 2014, Jaks announced that the Kaidi JV agreement had also been terminated due to failure to fulfil certain conditions precedent.

As at todate, the group has still not been able to raise the debt funding for the project. The Vietnamese government has given the group extension of time from March 2014 until October 2014 to achieve financial closure.

It seemed that pending finalisation of funding arrangement, the group has already started certain construction works. The company stated in its FY2013 adufited accounts :-

".. site clearance and land compensation has been completed and the site officially handed over. The group has started and / or completed project infrastructure works such as bombs detection and clearance, site backfilling, construction of main access road, boundary wall, and relocating high voltage transmission lines out of the project site. The directors of the company are of the view that no impairment is required in view of the positive progress of the project..." 

7. Concluding Remarks

(a) Jaks' fundmentals is not strong. It has high gearing and low profitbaility.

(b) The group's pipe manufacturing successfully secured more than RM600 mil contracts from the government. This division is expected to do well over next 3 to 4 years.

(c) The group ventured into property development in 2013 by acquiring 51% equity interest in a work-in-progress project for RM93 mil cash. The project company, MNH, will contribute some profit to the group and will retain a shopping mall as investment property upon completion in 2014.

Is it a wise move for a group with such high gearing to borrow money to hold an investment property ?

Why doesn't the group make use of its balance sheet to undertake its own development project ? Overall, I don't hold a very favorable view of the acquisition.

(d) The Vietnam project is extremely gigantic irregardless from market cap, balance sheet or capital expenditure point of view.

Has the group bitten off more than it can chew ? 

The group seemed to have been stucked between a rock and a hard place. If it withdraws from the project now, it has to write of all the capital expenditure that has been incurred, a move that could potentially lead to huge losses and erode its shareholders' funds substantially.

If it goes ahead with the project, it will need to make a huge cash call which will cause significant dilution to EPS as the project is targeted to be completed only by 2018 / 2019.

In the event that the equity injection is to be funded by borrowings, the project will cause the group's gearing to balloon further from existing RM400 mil plus to more than RM1 billion.

(e) As a conclusion, Jaks' fundamental is already very weak. The Vietnam power generation project further exarcebate the situation.  In my opinion, until this issue has been resolved, the stock will face a massive overhang.