1. Introduction
I have never been so lonely before. Since publishing my Jaks article on 27 July 2018, comments poured in from friends and foes. 99.99999% are negative. Even my relative called me to express concern (which I would like to convey my appreciation, the input is helpful and I duly took note of it).
I have to admit that bargain hunting is never an easy thing to do. Looking back, I have never been successful in buying at the bottom. Most of the time, after I took position, the stock continues to decline. But if share price indeed is deviating too much from fundamentals, the stock will eventually rebounce and generate positive return.
As mentioned before, I am very much an earning person. I buy a stock only if I am comfortable that the company is delivering reasonable profit. With this in mind, I conducted a quick study of Jaks' income statement.
2. Historical P&L
Key observations :
(a) Property division has not been doing well in latest two quarters, chalking up operating losses of approximately RM10 mil per quarter. Major reason is because of Liquidated and Ascertained Damages. Please refer to blue highlighted.
(b) However, Jaks only owns 51% of the property subsidiary. As such, the losses were diluted by positive Minority Interest. Please refer to yellow highlighted.
(c) Construction division is the star performer. The Vietnam power plant project commands very high profit margin of 27% (being RM25.2 mil / RM93 mil x 100%). Please refer below.
The domestic construction project only broke even. No wonder KYY has been nagging them to reduce exposure.
3. Prospective Earnings
Based on the above historical data, I came up with a crude financial model for Jaks' P&L.
First of all, Vietnam IPP could generate RM108 mil operating profit per annum (based on RM27 mil annualised).
Jaks' finance charges is approximately RM7 mil per quarter. This translates into RM28 mil per annum.
Property division incurs RM10 mil losses per quarter, meaning full year losses would be RM40 mil. As Jaks holds 51%, its share of losses would be RM20 mil.
Tax is quite minimum.
Putting everything together, net profit is approximately RM108 mil less RM28 mil less RM20 mil = RM60 mil.
This is more or less in line with analysts' forecast of approximately RM80 mil per annum. Please refer below.
In my opinion, my model is on the conservative side. I have assumed interest charges of RM28 mil and property division losses of RM40 mil per annum. As property division's losses might have already factored in a huge portion of the interest charges (the bulk of liability is in that division), there could be a bit of double counting.
4. Balance Sheets
When buying into a stock, one very pertinent question is whether the company will be facing liquidity crunches in the near to medium term (I am not Warren Buffett, I don't hold indefinitely). Let's look at the balance sheets.
Key observations :
(a) Receivables totalled RM1,010 mil. Payables RM841 mil. Please refer to blue boxes above.
There are wild talks that receivables are bad. For me, receivables are just receivables. To jump into conclusion that receivables is equal to Bad Debt is simply fear mongering. Which PLC does not have receivables ?
Jaks has been in business for long time. I am sure they have the proper mechasim to deal with collection.
In this regard, my most simplistic interpretation is that Jaks' payables can be fully settled by its receivables. Period.
(b) Jaks has total borrowings of RM571 mil. Is this something we should worry about ? To be sure, this level of borrowing is not something to be sneezed at. But this is mitigated by RM188 mil cash (please refer to red box above).
On top of that, the company completed disposal of several parcels of land to Sunway in April 2018. That will result in cash inflow of RM167 mil.
(Source : 2017 Annual Report)
This will boost cash level to RM355 mil.
The company will be undertaking a rights issue of Warrants to raise RM60 mil plus. Cash holding will hence become RM415 mil.
Of course, there is the infamous RM50 mil bank guarantee being called. I am not sure how much has that been reflected in the March 2018 quarterly report. Lets' just add the entire amount to the borrowings, which will then increase to RM621 mil.
Net borrowings will then be RM621 mil less RM415 mil = RM206 mil.
This is more manageable. I think over the next one to two years, liquidity shouldn't be a problem.
That is good enough for me. Like I mentioned before, I don't intend to hold indefinitely.
5. Dividend
Unlike toll roads that take 4 to 5 years to ramp up revenue (through growth of traffic), IPP can scale up revenue to maximum capacity from day one. So the gestation period is much shorter. Based on publicly available information, the company's 30% stake in Vietnam IPP could potentially generate RM200 mil net profit per annum upon completion.
Due to lack of information, I am not able to tell whether the profit could be distributed by the IPP to its shareholders. But the likelihood is that it could. For IPPs, the ability to distribute dividend is very much dependent upon its funding structure. Based on normal funding structure of 25% equity 75% debt (which is the case for Jaks' Vietnam IPP), the project is usually in a position to pay out dividend (just look at YTL Power, etc). Only in extreme cases such as Jimah Power (owned by Negeri Sembilan royalty and subsequently acquired by 1MDB) which has equity of only 10% (the remaining 15% funded by capital market through junior debt issuance, etc), the shareholders will not be able to enjoy dividend for long period of time.
China companies are not known for being generous on dividend. But IPP is different. The cash if not distributed will have no use for anybody. If Jaks indeed can receive dividend from the Vietnam IPP (which I believe would have been negotiated with their Chinese partner at the very beginning), the steady stream of cash inflow will have positive impact on balance sheets for many years to come.
Anybody has the relevant information, please let me know. I am happy to incorporate them in the article.
6. Concluding Remarks
Jaks' share price stabilised a bit today. A huge buyer has surfaced to mop up the shares. However, the purpose of my article today is not for chest thumping. It is too early to celebrate. There could still be a long night ahead before sunrise.
The purpose of this article is more to provide an objective analysis of Jaks' earning prospects and financial position. Hopefully this will allow people who are interested in taking position to have a better feel.
Have a nice day.
I have never been so lonely before. Since publishing my Jaks article on 27 July 2018, comments poured in from friends and foes. 99.99999% are negative. Even my relative called me to express concern (which I would like to convey my appreciation, the input is helpful and I duly took note of it).
I have to admit that bargain hunting is never an easy thing to do. Looking back, I have never been successful in buying at the bottom. Most of the time, after I took position, the stock continues to decline. But if share price indeed is deviating too much from fundamentals, the stock will eventually rebounce and generate positive return.
As mentioned before, I am very much an earning person. I buy a stock only if I am comfortable that the company is delivering reasonable profit. With this in mind, I conducted a quick study of Jaks' income statement.
2. Historical P&L
Key observations :
(a) Property division has not been doing well in latest two quarters, chalking up operating losses of approximately RM10 mil per quarter. Major reason is because of Liquidated and Ascertained Damages. Please refer to blue highlighted.
(b) However, Jaks only owns 51% of the property subsidiary. As such, the losses were diluted by positive Minority Interest. Please refer to yellow highlighted.
(c) Construction division is the star performer. The Vietnam power plant project commands very high profit margin of 27% (being RM25.2 mil / RM93 mil x 100%). Please refer below.
The domestic construction project only broke even. No wonder KYY has been nagging them to reduce exposure.
3. Prospective Earnings
Based on the above historical data, I came up with a crude financial model for Jaks' P&L.
First of all, Vietnam IPP could generate RM108 mil operating profit per annum (based on RM27 mil annualised).
Jaks' finance charges is approximately RM7 mil per quarter. This translates into RM28 mil per annum.
Property division incurs RM10 mil losses per quarter, meaning full year losses would be RM40 mil. As Jaks holds 51%, its share of losses would be RM20 mil.
Tax is quite minimum.
Putting everything together, net profit is approximately RM108 mil less RM28 mil less RM20 mil = RM60 mil.
This is more or less in line with analysts' forecast of approximately RM80 mil per annum. Please refer below.
In my opinion, my model is on the conservative side. I have assumed interest charges of RM28 mil and property division losses of RM40 mil per annum. As property division's losses might have already factored in a huge portion of the interest charges (the bulk of liability is in that division), there could be a bit of double counting.
4. Balance Sheets
When buying into a stock, one very pertinent question is whether the company will be facing liquidity crunches in the near to medium term (I am not Warren Buffett, I don't hold indefinitely). Let's look at the balance sheets.
Key observations :
(a) Receivables totalled RM1,010 mil. Payables RM841 mil. Please refer to blue boxes above.
There are wild talks that receivables are bad. For me, receivables are just receivables. To jump into conclusion that receivables is equal to Bad Debt is simply fear mongering. Which PLC does not have receivables ?
Jaks has been in business for long time. I am sure they have the proper mechasim to deal with collection.
In this regard, my most simplistic interpretation is that Jaks' payables can be fully settled by its receivables. Period.
(b) Jaks has total borrowings of RM571 mil. Is this something we should worry about ? To be sure, this level of borrowing is not something to be sneezed at. But this is mitigated by RM188 mil cash (please refer to red box above).
On top of that, the company completed disposal of several parcels of land to Sunway in April 2018. That will result in cash inflow of RM167 mil.
(Source : 2017 Annual Report)
This will boost cash level to RM355 mil.
The company will be undertaking a rights issue of Warrants to raise RM60 mil plus. Cash holding will hence become RM415 mil.
Of course, there is the infamous RM50 mil bank guarantee being called. I am not sure how much has that been reflected in the March 2018 quarterly report. Lets' just add the entire amount to the borrowings, which will then increase to RM621 mil.
Net borrowings will then be RM621 mil less RM415 mil = RM206 mil.
This is more manageable. I think over the next one to two years, liquidity shouldn't be a problem.
That is good enough for me. Like I mentioned before, I don't intend to hold indefinitely.
5. Dividend
Unlike toll roads that take 4 to 5 years to ramp up revenue (through growth of traffic), IPP can scale up revenue to maximum capacity from day one. So the gestation period is much shorter. Based on publicly available information, the company's 30% stake in Vietnam IPP could potentially generate RM200 mil net profit per annum upon completion.
Due to lack of information, I am not able to tell whether the profit could be distributed by the IPP to its shareholders. But the likelihood is that it could. For IPPs, the ability to distribute dividend is very much dependent upon its funding structure. Based on normal funding structure of 25% equity 75% debt (which is the case for Jaks' Vietnam IPP), the project is usually in a position to pay out dividend (just look at YTL Power, etc). Only in extreme cases such as Jimah Power (owned by Negeri Sembilan royalty and subsequently acquired by 1MDB) which has equity of only 10% (the remaining 15% funded by capital market through junior debt issuance, etc), the shareholders will not be able to enjoy dividend for long period of time.
China companies are not known for being generous on dividend. But IPP is different. The cash if not distributed will have no use for anybody. If Jaks indeed can receive dividend from the Vietnam IPP (which I believe would have been negotiated with their Chinese partner at the very beginning), the steady stream of cash inflow will have positive impact on balance sheets for many years to come.
Anybody has the relevant information, please let me know. I am happy to incorporate them in the article.
Jaks' share price stabilised a bit today. A huge buyer has surfaced to mop up the shares. However, the purpose of my article today is not for chest thumping. It is too early to celebrate. There could still be a long night ahead before sunrise.
The purpose of this article is more to provide an objective analysis of Jaks' earning prospects and financial position. Hopefully this will allow people who are interested in taking position to have a better feel.
Have a nice day.
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