Brokers Call - Mudajaya — A polished gem

Mudajaya Group Bhd
(June 24, RM5.11)
Maintain buy with target price of RM7.94: We were encouraged by management’s increased optimism during our Small To Mid Cap conference, particularly on the outlook for local infrastructure-related contracts. Mudajaya’s regional ventures are progressing well and are likely to result in at least one project win.

We make no changes to our earnings forecasts, buy recommendation or target price of RM7.94, which is based on an unchanged 20% discount to RNAV.

Potential share price catalysts include (i) contract awards (ii) swifter-than-expected progress of the ultra mega power plant (UMPP) project in India, and (iii) positive earnings surprises. Mudajaya offers superior earnings growth, ROEs of 30% to 44% and CY10-11 PERs of seven to nine times, which are among the lowest in the sector.

The management reiterated its target of securing at least RM1 billion worth of new contracts, mostly PFI jobs, by end-2010. It remained optimistic that the target could be exceeded. The recently announced 10MP laid out several new opportunities. We think that the group is in talks to participate in a highway project worth over RM1 billion.

Mudajaya is now more upbeat on the potential IPP/EPCC project in Laos, Indonesia and Saudi Arabia. We were pleasantly surprised to learn that the group could be close to securing an IPP (independent power producer) job.

Among the projects that it is vying for are a RM400 million hydro power IPP in Laos and a RM300 million to RM400 million EPCC job in Indonesia, which is still at the preliminary stage. The group sees opportunities in EPCC, highways and building projects in Saudi Arabia.

Mudajaya is vying for one of the seven proposed highways worth a total of RM19 billion. Though details are limited at this point, we think the group is in talks to participate in a highway worth over RM1 billion.

The seven highways include West Coast Expressway (WCE) (RM5 billion to RM6 billion), Guthrie-Damansara Expressway, Sungai Juru Expressway and Paroi-Senawang-KLIA Expressway. As Mudajaya will complete the RM958 million KL-Kuala Selangor Expressway by 1H2011, it has the capacity to take on another major highway job.

The group said that new power plant opportunities have emerged locally. The 10MP also highlighted the construction of two coal-fired power plants worth RM7 billion.

The group views this as a good opportunity given its track record and expertise in power plants. We concur with management as Mudajaya constructed more than half of Tenaga’s first-generation power plants. The management highlighted that the two coalfired power plants should be a priority and should be commissioned in five years as the country’s power reserve margin must be kept above 20% to ensure efficient power distribution.

The likelihood of this project going ahead has increased now that it is confirmed that power from Bakun will not be transmitted to Peninsular Malaysia. Based on an estimated development cost of RM3.5 million/MW, a 500MW-1,000MW power plant could cost RM1.8 billion to RM3.5 billion.

The management does not discount the possibility of participation as an EPC contractor. Progress of this project is likely to pick up in the next couple of months. — CIMB Research, June 24

Written by Kay 
The Edge Malaysia