Jaks Resources - Business Sense
I have been using all kind of methods to derive the earnings estimates for the Hai Duong Thermal Power Plant in Vietnam, but now I would like to talk about my very first "business sense" towards Jaks Resources when I first heard about its power plant in Vietnam.
Some may claim that business sense is unreliable and very much depends on one's business experiences. This is true to certain extend but it can also be the most reliable if one has sufficient knowledge in the business world. I often heard from my friends talking about their experiences in evaluating housing project. By looking at a development plan, they could determine the capital requirements, material and labour costs, and the expected profits without detailed calculations. This is what people call "speaking from experience". To me, this is also "business sense".
I have been in business for quite a while and I can tell you the followings;
- Capital is always the most vital element in any business project. Without capital, nothing moves.
- The principle of scarcity determines the economic returns of projects. The larger the size of project and hence the capital requirement, the larger the investment return. The more complex the project, the higher the investment return.
- The higher the risks, the higher the return
Let me apply my business sense to Jaks Hai Duong Power Plant.
First few things that crossed my mind;
- The Vietnam Government awarded all large BOT power plants to foreign operators because the capital requirements are too big for the locals.
- Difficult to get approvals from governments for banks to finance projects in another country.
- Coal power plants are facing global protest on environmental issues making financing very difficult.
- Very few companies have the technical capability to build a US$1.87b power plant of 1,200MW capacity.
My Immediate deduction;
I knew Jaks Resources has struck something huge, something beyond its capacity and capability. The fact that it managed to get it off the ground means it has hit a Jackpot !
Arrangements that gave me the greatest confidence;
The most unbelievable part of the deal is Jaks did not need to arrange for bank borrowings which is entirely backed by its partner, CPECC.
The loan is non-recourse which means the banks cannot pursue against Jaks or CPECC if the power plant fails to repay its loan. Hence, the banks must have ensured that the power plant will be profitable and able to repay its loan. You should know how conservative banks are. They want guarantee from the Vietnam government !
A quick calculation was done;
CEO Andy Ang gave a payback period of 8 years, so left with 17 (25 - 8) years to profit.
Therefore, total profit from the power plant will be;
US$1.87 billions / 8 years x 17 years = US$ 4b x 4.2 (USD/RM) = RM 16.8b
Jaks 30% sharing = RM5 billions = RM200m per year = RM0.31 Earning per share (EPS)
Jaks 40% sharing = RM6.7 billions = RM268m per year = RM0.42 Earning per share (EPS)
I asked myself whether this is reasonable;
I told myself investing in Vietnam is risky and the capital requirement is huge and the project requires technical expertise, so a payback period of 5 years should be more reasonable. Anyway, 8 years payback is safe for decision making.
I told myself I can't be wrong buying Jaks and it is definitely a multibagger stock !
I knew I have found a hugely undervalued gem, so I undertook in-depth analysis and confirmed my business sense.
Just to share my thoughts, thanks for reading.
Hope you will like it.
DK66
https://klse.i3investor.com/blogs/Jaks%20resources/2019-12-16-story248464-Jaks_Resources_Business_Sense.jsp
