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Mudajaya Group (OSK Research) buy; target price RM7.33

Mudajaya Group
Unstoppable Momentum


Mudajaya posted 1QFY10 earnings of RM51m (+260% y-o-y, +23% q-o-q), which was above our expectations and consensus. We see stronger showing in the subsequent quarters once Phase 2 gains further momentum. Forward prospects include India’s UMPPs, LRT extension, domestic power plants, Saudi jobs and PFI projects. We raise our FY10-11 earnings by 13-14%. Mudajaya remains our top sector pick.

Beating estimates again! Mudajaya’s 1QFY10 results came in with revenue of RM239.4m (+90.9% y-o-y, +13% q-o-q) and earnings of RM50.6m (+260.3% y-o-y, 23.2% q-o-q).

Margins doubled y-o-y, with EBIT and net numbers at 31.7% and 21.1% (FY09 comparatives at 15.4% and 11.2%). Overall, 1Q earnings made up 26.6% of our
projections and 24.5% of consensus, which are deemed above forecasts given expectations of the subsequent quarters being stronger.

Update on Chhattisgarh. The Chhattisgarh IPP EP contract was 10% complete as of 1Q (vs 5% in 4QFY09). The bulk of the recognition thus far has come from Phase 1 (RM762m), suggesting even stronger earnings growth once Phase 2 (RM2.64bn) goes into full swing. We gather that civil works for both phases (~RM400m) have commenced. On the debt financing for Phase 2, management said the remaining 34% (INR13bn) will be finalized soon and the approved loan sum exceeded its requirement by INR2bn.

Eyeing the UMPPs. We understand that prequalification tenders for 5 Ultra Mega Power Plants (UMPPs) in India will be called very soon. Each UPMM will have capacity of 4000MW and the EP value could be worth USD4-4.8bn. We understand that Mudajaya and RKM are in talks with a Malaysian IPP player to form a consortium and bid for the UMPPs.

If successful, we think Mudajaya could land itself a slice of the EP contract. Positive for more. Management is guiding for RM0.5-1bn in new jobs for FY10. Mudajaya was one of the 17 prequalified contractors for the RM7bn LRT extension. We think Mudajaya could land some packages given its track record with the existing LRT stations and KLIA track transit. We believe it may also participate in some civil contracts for the planned 6000MW capacity expansion by TNB (BUY, TP: RM10.15) given its expertise as a power plant contractor. Overseas, Mudajaya is exploring construction and EP contracts in Saudi Arabia and is in the midst of obtaining a licence.

Potential for PFI jobs. Recently, 3 Private Finance Incentive (PFI) jobs worth > RM500m were awarded for various new UiTM campuses. This signals that the long-awaited PFI projects are finally gaining traction. Mudajaya is a key beneficiary from such jobs given its strong balance sheet. The company is also eyeing 2 PFI projects collectively worth RM3bn.

VALUATION & RECOMMENDATION

Maintain BUY, TP raised to RM7.33. Following the strong results, we have raised our FY10-11 forecasts by 13%-14% on the back of (i) higher civil and EP margins, and (ii) stronger revenue recognition for Phase 2. We also introduce our FY12 earnings estimate of RM305m (+9.9% y-o-y). There could be further upside to our FY12 projection as we have yet to factor in associate contributions from Phase 1, which should be fired up by then. Our TP continues to be based on 14x FY10 earnings, reflecting the average forward multiple of large cap contractors.

Top sector pick. Mudajaya remains our top sector pick for its superior fundamentals, which include (i) strong earnings growth with a 3-year CAGRf of 37%, (ii) sizeable orderbook balance of RM5.2bn, (iii) above industry profit margins, (iv) superior forward ROEs of 30%-40%, (v) net cash position, and (vi) lucrative recurring income over the mid-term, which we have yet to factor in.
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