JAKS sees upswing in fortunes

KUALA LUMPUR: JAKS Resources Bhd is finally poised for a change in fortunes, with its property and dam projects as well as the US$1.6 billion (RM5.12 billion) independent power plant in Vietnam underpinning a positive outlook.

JAKS took over the listing status of Wing Tiek Holdings Bhd in July 2004 but immediately faced a hurdle when its multi-million ringgit concession to supply pipes and fittings to Selangor, Kuala Lumpur and Putrajaya in 2004 was rescinded.

The dispute is still in the courts.

“The (10-year) concession would have provided recurring income for JAKS. The group had to work extra hard with low capacity utilisation, bidding and sourcing new projects,” its group general manager for finance Chee Seong Heng told The Edge Financial Daily in an interview.

The slow progress in water infrastructure projects in Selangor impacted its core business in the manufacturing of small and big diameter pipes.

Unfazed by the setback, it managed to secure several pipe-laying and reservoir construction projects outside the Klang Valley, said Chee. “The company’s priority was to seek out projects providing recurring income.”

In 2008, JAKS secured a RM122 million project to build phase two of the Beaufort water treatment plant in Sabah. That year, it also secured the RM195 million waterworks project to lay a submarine pipeline from the water treatment plant in Beaufort to Labuan.
Then came an opportunity for the company to venture into property development. It teamed up with Island Circle Development (M) Sdn Bhd to transform JAKS’s disused warehouse in Subang Jaya into a commercial property.

“Work on the USJ Sentral project started in 2007 and was completed in 2008. The gross development value (GDV) was RM135 million. All the units have been sold,” said Chee.

“It provided the exposure for JAKS to take on bigger property projects, with the recent successful bid to redevelop Star Publications (M) Bhd’s former headquarters in Section 13, Petaling Jaya,” he said.

JAKS will hold a 51% stake and Island Circle 49% in the joint-venture company JAKS Island Circle Sdn Bhd (JIC) to redevelop the Star land.

“The GDV for the Star land hinges on the plot ratio. If it is 1:3.5 times, then the GDV could be RM400 million and if the plot ratio is 1:6 times, the GDV could be between RM500 million and RM600 million,” he said.

In March, Star announced that the proposed development, with a GDV of RM370 million, would comprise two office blocks, a 20-storey commercial-cum-educational block and a 15-storey residential block.

Its ability to edge out larger players had indeed put JAKS under the spotlight.

Under the agreement, Star will be entitled to 30% of the GDV, or at least RM111 million, based on the plot ratio of 1:3.5. The cost of the development, estimated at RM280 million, would be borne by JIC.

Chee said one of the four tower blocks would be owned by JIC, which would be leased to Universiti Tunku Abdul Rahman (Utar) for 25 years.

One block will be handed back to Star while JAKS will take two blocks for development into condominiums/retail and office outlets.

“JIC has submitted the development plan and design concept for the project. We hope to complete the project in two years instead of three years as it would be more viable to do in a shorter period and minimise the disruption at and around the worksite,” he said.

RHB Research Institute estimated JAKS’ total unbilled construction order book at RM1.31 billion, of which RM813 million were projects it had secured including the Paya Peda dam in Besut, Terengganu, and a potential property development project in Subang which could have a GDV of RM500 million.

JAKS had also made a foray into Vietnam to undertake the US$1.6 billion independent power project (IPP) in Hai Duong Province, which comprises two units of 600MW each.

JAKS is the major co-sponsor for the coal-fired IPP and due to its lack of experience in power plants, it has roped in China Huadian Corporation’s unit, China Huadian Engineering Co Ltd, to undertake the engineering, procurement and construction (EPC).

Chee said the IPP would be financed 80% by debt and 20% by equity.

It is learnt the joint venture has secured a partner to provide the financing for the 80% while the 20% would likely be from JAKS and other equity partners.

“JAKS is working out the equity financing which could include internally generated funds or rights issue,” he said. Its gearing is 25% of shareholders funds.

JAKS said it had concluded negotiations with China Huadian Engineering for the EPC contract for the project.

Work is slated to begin in the last quarter of this year and the commercial operation for the first unit of 600MW is scheduled in the fourth quarter of 2014 while the second unit of 600MW would follow in the second quarter of 2015.

Coal will be supplied from domestic sources and Chee expected the price to be one-third cheaper than imported coal.

Chee added that the IPP, which is under the build-operate-transfer concept, would provide recurring income over a 25-year period. JAKS hoped to take on ancillary projects near the power plant, including the roads and jetty, he added.

RHB Research believes JAKS’ successful completion of the IPP will strengthen its bid for other power projects either in the same location or in new areas. It has projected Vietnam’s power demand to grow by more than 10% per annum over the next five years.

On the home front, JAKS is working on the ministry of agriculture and agro-based industry’s Paya Peda dam, covering around 3,000 acres (1,214ha), including the impounding area. The total contract sum is RM333 million. The water will be used for irrigation and for the water treatment plant.

Chee expected to see income from the project in 2011.

As for the Pahang-Selangor inter-state piping project, it is learnt that JAKS is bidding for the link from the Kelau dam in Pahang to the tunnel — which will encompass two 12km-long pipes of three-metre diameter.

It also hopes to secure the contracts for the piping works at the Langat 2 water treatment plant in Selangor and from the water treatment plant to the reservoirs.

Chee believed JAKS’ outlook would improve based on the recent positive developments especially the Paya Peda dam, Star property and the Vietnam IPP.

RHB Research has a sum-of-parts fair value of RM2 for JAKS, boosted by the Vietnam IPP. It expects the company’s financial position to strengthen from this year.

JAKS posted a net loss of RM6.74 million for the financial year ended Oct 31, 2009. The research house projects the company’s fortunes to improve and report a net profit of RM11.1 million for FY10, RM16.3 million for FY11 and RM22.2 million for FY12.

This article appeared in The Edge Financial Daily, April 19, 2010.