Mudajaya awarded additional works for Pengerang Cogen plant

Mudajaya Group Bhd (Oct 6, RM1.02)

Upgrade to hold with an unchanged target price (TP) of 99 sen: Mudajaya Group Bhd announced that it was awarded an additional work scope for the ongoing Pengerang Cogen plant civil works. The additional works amount to RM43.9 million, bringing the revised contract sum to RM99.4 million. The job is scheduled for completion by July 2017.

With this smallish contract in the bag, Mudajaya’s year-to-date (YTD) job wins stand at RM533 million. We estimate that this brings its order book to RM1.5 billion, implying a cover ratio of 1.8 times on financial year 2014 (FY14) construction revenue. This is a lauded recovery from its cover ratio of only 1.1 times as at end of the second quarter (2Q).

Our most immediate concern about Mudajaya remains its margins. Mudajaya has been in the red for three consecutive quarters,
i e since 4QFY14 ended Dec 31, due to cost overruns on selected domestic jobs in its order book. Until some turnaround signs are witnessed on this front, it is hard to turn bullish on earnings.

Risks include slow order book replenishment, further delays in the operation of the Chhattisgarh independent power producer (IPP). Although YTD job wins of RM533 million have surpassed our FY15 order book replenishment target of RM300 million, we are in no hurry to raise our earnings forecast as its annual job wins tend to be rather lumpy and inconsistent. There is also a downside risk to earnings should the Chhattisgarh IPP fail to commence according to our postulated timeline.

We continue to project a breakeven year for FY15, which hinges heavily on second-half (2H) numbers returning to the black to offset the reds in 1H.

While we are not exactly bullish on Mudajaya’s earnings prospects, the recent share price retracement now warrants us to upgrade our rating from a “sell” to “hold”. We reckon that its watershed earnings for this year have been adequately priced in. Our unchanged sum-of-parts- based TP of 99 sen applies a 30% discount and implies FY16 price-earnings ratio of 11.3 times, but this hinges heavily on Mudajaya’s IPP earnings coming in — Hong Leong IB Research, Oct 6

This article first appeared in The Edge Financial Daily, on Oct 7, 2015.