JAKS Resources’ Vietnam power project to boost earnings growth

KUALA LUMPUR: Affin Hwang Capital Research has revised up its target price for JAKS Resources to RM2 from RM1.60, after reviewing the value of its asset, as the company has decided to realign its focus on Vietnam given the slowdown in the property market in Malaysia. 

“We are also reiterating our Buy call on JAKS as we believe the current valuation has not fully reflected the upside from its Vietnam power plant project,” it said on Wednesday.

The research house said more than 84% of its target price is derived from the Vietnam power plant project, either through the EPC contract or future cash flow from the power plant. 

“We believe that the risk of a delay in the project is lower than previously anticipated, as the construction work has already started on the ground. Most of the construction work is being carried out by CPECC, a subsidiary of CEEC, which specialises in the construction of power plants,” it added.

Affin Hwang Research said JAKS management has guided that the project internal rate of return (IRR) is only at 10% on the basis that the plant would be operating at 76% utilisation rate. 

However, there is a possibility that the plant could actually operate at a higher utilisation rate on increased demand for stable electricity in Vietnam. 

A 1% increase in utilisation will raise the power plant RNAV by 5% or the group RNAV by 2%.

“We are positive on the management direction to realign its priority focusing on its construction tender and Vietnam venture, as the disposal of its non-core assets will reduce its debt exposure. 

“Despite the relatively weak property market, we do not think that management will dispose those assets at a loss hence our valuation at book value should be reasonable, even if the disposal might take some time to complete,” it said.

Affin Hwang Research said the downside risks to its call include: i) a change in Vietnam government policy on foreign-owned power plant projects; and ii) lower-than-expected orderbook wins.

“We maintain our Buy rating with a revised up TP of RM2, based on a 20% discount to the group RNAV. The catalyst for the stock will be continued delivery of EPC profit from the Vietnam power plant project, as we believe most investors are still not fully convinced about the JV’s ability to deliver the project on time,” it noted.

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