This report has been prepared by CIMB for the CMDF-Bursa Research scheme.

UPDATE REPORT

CIMB Research Report

9 August 2010

Mudajaya RECOM Buy

RM4.00
PRICE
The other side of the coin MKT CAPITALISATION RM1,644.8m
BOARD Main
SECTOR Construction
INDEX COMPONENT FTSE Emas

MDJ MK / MJYA.KL Sharizan Rosely + 60 (3) 2084-9864 – sharizan.rosely@cimb.com

Investment highlights
• Maintain BUY. We view positively management’s efforts to confront investors’
concerns last Friday. We believe there are reasons to question the credibility,
content and motive of the poison letter. The SC’s indications of a speedy closure of
this episode should also provide some comfort. We make no changes to our
forecasts, BUY recommendation or RM7.94 target price, which is pegged to an
unchanged 20% discount to RNAV. Clarity on the issue with the SC could lead to
further recovery of the share price which rebounded last Friday. Positive revelations
from the briefing and conference call could aid a recovery in sentiment. In the
medium term, potential re-rating catalysts include (i) contract awards (ii) swifter-
than-expected progress of the UMPP project in India, and (iii) positive earnings
surprises.
• Issues in poison letter. During last Friday’s briefing, management dismissed the
allegations made in the poison letter. Issues brought up were (i) the premium paid
for the 26% JV stake (ii) the round-tripping of profits for the EP works of the power
plant, and (iii) high profit margins expected from the EP works. This episode is not
likely to jeopardise Mudajaya’s existing bids, both locally and in India. Management
also brushed aside speculation that the existing IPP is under investigation by the
Indian government.
• Counter arguments make sense. The total value of investment for Mudajaya’s
equity stake is disproportionate to its 26% share in R.K.M Powergen but this
appears to be justified by what R.K. Powergen brings to the table. The EP works are
awarded to a subsidiary in Mauritius to take advantage of the tax-free regime.
Management reminded investors that financing for Phases 1 and 2 of the Indian IPP
was fully secured, which is very significant. The DCF value of the IPP concession
has been the subject of contention but management illustrated the intrinsic value of
the IPP by revealing the total amount of coal cost savings for the venture. We
estimate it to be as much as US$6.9bn.

Key stock statistics Per share data

FYE Dec 2009 2010F FYE Dec 2007 2008 2009 2010F
EPS (sen) 31.4 56.4 Book Value (RM) 0.57 0.73 1.01 1.56
P/E (x) 12.7 7.1 Cash Flow (sen) 9.1 12.9 30.2 63.2
Dividend/Share (sen) 4.8 4.8 Earnings (sen) 7.3 12.1 31.4 56.4
NTA/Share (RM) 1.01 1.56 Dividend (sen) 4.3 4.4 4.8 4.8
Book Value/Share (RM) 1.01 1.56 Payout Ratio (%) 58.2 27.3 16.2 8.5
Issued Capital (m shares) 411.2 411.2 P/E (x) 54.6 33.1 12.7 7.1
52-weeks Share Price Range (RM) RM1.40 / RM6.10 P/Cash Flow (x) 44.2 31.0 13.2 6.3
Major Shareholders: % P/Book Value (x) 7.1 5.5 4.0 2.6
Dataran Sentral (M) Sdn Bhd 26.9 Dividend Yield (%) 1.1 1.1 1.2 1.2
Mulpha Infrastructure Holdings Sdn bhd 23.5 ROE (%) 15.8 25.9 34.4 43.9
United Flagship Sdn Bhd 9.9 Net Gearing (%) net cash net cash net cash net cash

Source: Company, CIMB estimates, Bloomberg

Please read carefully the important disclosures at the end of this publication.
Recent developments
Last Friday, we hosted a conference call and briefing for Mudajaya to update investors
on the recent developments surrounding the Securities Commission’s (SC) query on
its Indian IPP. The meeting also addressed, to a certain extent, several issues that
surfaced from the anonymous "poison letter/complaint letter" which also focused on
the group’s Indian venture. Both the events, where the company were represented by
MD/CEO Ng Ying Loong and ED Anto Joseph, attracted over 30 fund managers.

Highlights
Issues in poison letter. Management started off the meeting by dismissing the
allegations made in the letter. Issues brought up were (i) the premium paid for the
26% JV stake (ii) the round-tripping of profits for the EP works of the power plant, and
(iii) high profit margins expected from the EP works. This episode is not likely to
jeopardise Mudajaya’s existing bids, both locally and in India. Management also
brushed aside speculation that the existing IPP is under investigation by the Indian
government.
Satisfactory meeting with the SC. During its meeting with the SC last Tuesday, the
SC clarified that this is just a normal query as it typically follows up on complaints.
This should be a source of relief as investors previously thought that Mudajaya was
the subject of a full investigation. Several documents pertaining to the JV structure
and more details about the Indian IPP were shared. Although the meeting did not lead
to any conclusions, it appears that the SC is looking for a quick resolution of this
matter, which is positive. Also encouraging is Mudajaya’s willingness to organise a trip
to Chhattisgarh for investors to observe the progress on site. This should dispel
doubts about the existence of the 900+ acre site and the developments on site.
Update of progress on site. Major civil works/construction including site preparation
has reached 15% completion. There are 7-8 contractors on site. Development of the
power plant facility also involves the building of transmission lines and a 23km water
pipeline. Civil works worth RM400m is also being undertaken by Mudajaya through
local contractors. But margins are relatively thin, which is typically the case. Overall
progress is on track and minor delays should not disrupt the overall timetable. Various
equipment for unit 1 (1 x 360MW) is on track to arrive in 1-2 weeks’ time. For each
unit, there are 17 different delivery packages.

Figure 1: Update of Chhattisgarh IPP

IPP JV Company : R.K.M Powergen Pvt. Ltd.
A subsidiary of : R.K. Powergen Pte. Ltd.
Base operations : Chennai, India
Managing Director : Dr. Andal Arumugam
Total land size : 900+ acres
Land size (utilised) : *700+ acres
Progress on site : 15%
Site prepartion works : Ongoing
Foundation works for 4 main boilers : Ongoing for boilers 1 & 2
Chimney works : Early stages
Transmission line : Ongoing
Water pipeline (23km) : Ongoing
Civil works : Ongoing
Equipment and procurement (EP) : Shipment started for Unit 1 - arrival 1-2 weeks

RK Powergen - owner and operator of (i) 25MW biomas plant in Karnataka

(ii) 64MW coal-fired power plant near Chennai
*Optimum plant configuration for 4 x 360 MW - expandable by another 2 x 360 MW
Source: Company, CIMB estimates

The price for JV stake. Prior to the signing of the shareholders’ agreement in Jul 05,
Mudajaya was likely to end up with a stake lower than 20%. But felt that it was
important to secure at least an associate stake as it would give it a say in the
decisions made by the JV company and allow the group to equity-account the profits
of the IPP. This came with a price. Our calculations show that Mudajaya's total value
of investment for its equity stake is disproportionate to its 26% share in R.K.M
Powergen.

[ 2 ]
Mudajaya’s total commitment amounts to RM860m, which is more than double the
RM302m underlying value of its 26% stake. This, in our view, is justified by what R.K.
Power (74% shareholder of R.K.M. Powergen) brings to the table, i.e. the IPP contract
and an opportunity for Mudajaya to make a foray into India’s power industry. For its
equity stake, Mudajaya has paid up RM246m as at Mar 10 through a mix of internal
funds and share placement exercises. Management remains confident that it will be
able to fulfil the estimated balance of RM614m over the next 2-3 years given the
cashflows generated from the RM3.4bn EP contract and the existing cash pile of
RM295m. Management is looking at total profits of over RM700m from the EP works.
Also, we are looking at RM150m-200m associate contributions p.a. when the 26%-
owned power plant is fully commissioned and starts selling power in 2013.

Figure 2: Breakdown of IPP development value, job scope and equity portion
Breakdown of total development cost RM m
Phase 1 1,088
Phase 2 3,778
Total 4,866

Breakdown of project scope RM m

Total EP works 3,390
Civil works 400
M&E, others 1,076
Total 4,866

Breakdown of equity portion by phases (vs total development cost) RM m

Phase 1 (unit 1) - 20% 218
Phase 2 (units 2,3 & 4) - 25%) 945
Total 1,162

Share of equity portion by JV partners RM m

Mudajaya share of equity portion (26%) 302
RK Power's share of equity portion (74%) 860
Total 1,162

Mudajaya equity commitment as per shareholders agreement RM m

Mudajaya's equity commitment 860
Committed as at Mar 10 (internal funds + share placements) 246
Balance - over next 2-3 years 614

Phase 1 debt:equity ratio = 80:20

Phase 2 debt equity ratio = 75:25
Mudajaya's cash balance as at 1Q10 = RM295m

Source: Company, CIMB estimates

The EP contract. Also, what needs to be understood is that while Mudajaya will earn
recurring profits from its stake in the IPP starting 2013, the company was also
awarded the RM3.4bn equipment and procurement (EP) contract for the power plant
facility. Typically for the development of power plants, these works carry the biggest
value as it not only involves the supply of the major equipment such as boilers,
turbines and generators but it also includes plant commissioning, testing and
optimisation. This contract was awarded by R.K.M Powergen (JV co.) to Mudajaya
through its 80%-owned MIPP International Ltd, which is a company incorporated in
Mauritius.

The rationale for this award structure is to take advantage of the robust tax treaty
between India and Mauritius. We gather that more than 90% of companies doing
business in India follow this structure as profits booked through Mauritius are tax-free.
Concerns over potential tax evasion should not surface. The 20% balance is held by
another engineering company, which is undertaking/assisting part of the procurement
process in China.

[ 3 ]
Still expecting strong margins. Management reiterated that the timing for the
clinching of EP orders from China was one of the main reasons for the expected
strong EP margins. Mudajaya entered into contracts with at least three Chinese OEM
manufacturers after the crisis in 2008/09. At that time, prices for major power plant
equipment had collapsed 20-50% due to weak demand. The group eliminated the
supply chain by directly sourcing raw materials/parts for the fabrication of the
equipment (boilers & generators). Furthermore, stimulus packages initiated by the
Chinese government at the time resulted in export tax incentives for the OEM
manufacturers, which led to further cost savings for Mudajaya. We have assumed 20-
25% pretax margins for the EP works which we believe is conservative. Indications
are that the margins are higher and may exceed 25%.
Very little basis for round-tripping profits? Management defended its JV/profit
model as being one that does not contain any round-tripping profit schemes. Based on
its understanding, round-tripping of profits typically occurs when the project cost is
bumped up to benefit related parties or subcontractors for the award of other portions
of construction of a large-scale project. Management explained that in Mudajaya's
case, the total development cost/per MW of US$0.9m for the 1,440MW power plant is
16% below the standard/benchmark for existing IPPs in India of about US$1-
1.2m/MW. This is positive. Given that the group's Indian IPP is one of the cheapest
ones around, there is arguably very little basis for round-tripping profits to begin with.
In Chhattisgarh alone, over 100 MOUs were signed for the development of power
plants but only three have taken off and progressed to advanced stages. Two of them
are Jindal’s power plant and R.K.M. Powergen’s facility.

Figure 3: Cost/MW comparison

Cost/MW Cost/MW Cost/MW
(US$ m) (RM m) (Crore)
India's average benchmark 1.2 3.8 5.5
Jindall's IPP - 30km from R.K.M.'s site 1.2 3.8 5.5
Mudajaya's IPP (1,440 MW) 1.0 3.2 4.6
Discount to other IPPs (%) -16% -16% -16%

Source: Company, CIMB estimates

Significance of financial closure. Management reminded investors that financing for

Phases 1 and 2 of the Indian IPP was fully secured, which is a big milestone. We got
the sense that this news was generally a positive surprise for investors. Full financial
closure should address concerns over the viability of the project as proper due
diligence would have already taken place. Among the financiers, the lead syndicator is
Power Finance Corp (PFC) which is the only authority that oversees the financing of
power plants in India. Total financing secured for the IPP project amount to RM3.7bn,
which meets the debt ratio of 75% for Phase 1 and 80% for Phase 1. Drawdown is
made in proportion to work done. So far, US$50m (RM170m) has been drawn down
for Unit 1 while the drawdown for Phase 2 (units 2, 3 & 4) is expected to commence
soon. As at Jun 10, the JV has secured full financial closure. The borrowings are non-
recourse.

Figure 4: Debt:equity portion for 1,440MW coal-fired power plant

Debt:Equity Development Debt portion Funding
ratio value (RM m) (RM m) secured
Phase 1 (1 x 360 MW) 80:20 1,125 900 Full
Phase 2 (3 x 360 MW) 75:25 3,670 2,753 Full
Total 4,795 3,653
Source: Company, CIMB estimates

[ 4 ]
Figure 5: Breakdown of financiers
Financial closure Phase 1 (1 x 360MW) Value (RM m)
Financial institutions:
1. Power Finance Corporation Ltd (PFC) Lead Sydicator 393
2. Rural Electrification Corporation Ltd 204
3. Housing and Urban Development Corporation 151
4. Indian Bank 76
5. Vijaya Bank of India 38
6. PTC India Financial Services Ltd 38
Total 900
INR:RM = 1:0.0756

Financial closure Phase 2 (3x 360 MW) Value (RM m)

Financial institutions:
1. Power Finance Corporation Ltd (PFC) 1,052
2. Rural Electrification Corporation Ltd 818
3. Bank of Baroda 213
4. Punjab National Bank 213
5. Housing and Urban Development Corporation Ltd 213
6. Indian Bank 124
7. Corporation Bank 71
8. PTC India Financial Services 50
Total 2,754
INR:RM = 1:0.0711

Total debt funding for 1,440 MW (RM m) 3,655

Source: Company, CIMB estimates

Value of the IPP is huge, going by coal cost savings. The DCF value of the IPP
concession has been the subject of contention but management illustrated the intrinsic
value of the IPP by revealing the total amount of coal cost savings for the venture. We
estimate it to be as much as US$6.9bn. The IPP was granted two sources of coal (i)
coal mining concession awarded to R.K.M Powergen, which was secured through a
bidding process, and (ii) a coal supply linkage from the Indian government. The
effective coal cost is US$10-20/tonne compared to the international price of about
US$90/tonne. For the IPP concession, this translates into coal cost savings of at least
US$70/tonne. Given that the IPP requires a total of 99.5m metric tonnes of coal, the
total coal cost savings is as much as US$6.9bn. Coal in India is subsidised by the
government and regulated by state-owned Coal India. Our checks indicated that
current coal prices there are about US$17-36/tonne. There are indications that prices
may be raised by about 10% to US$20-40/tonne, which is well below international
prices. The contract for the IPP is a built-operate-own (BOO) one with full cost pass-
through.

Figure 6: P&L analysis (RM m)

FYE Dec 2007 2008 2009 2010F
Revenue 274.0 422.4 720.0 1,900.7
Operating Profit (EBIT) 40.0 63.3 166.4 337.6
Depreciation (3.7) (3.2) 3.9 (4.3)
Interest Expenses 0.0 0.0 0.0 0.0
Pretax Profit 41.4 65.5 165.7 353.4
Effective Tax Rate (%) 15.3 12.5 18.4 17.0
Net Profit 30.1 45.1 116.9 232.0
Operating Margin (%) 14.6 15.0 23.1 17.8
Pretax Margin (%) 15.1 15.5 23.0 18.6
Net Margin (%) 11.0 10.7 16.2 12.2
Source: Company, CIMB estimates

Comments
Management’s stance was positive and reassuring. Though there were no major
surprises, the issues discussed during the briefing and conference call tie in with our
expectations. Please refer to our earlier notes explaining the situation. We view
positively management’s efforts to address investors’ concerns over the poison letter
and the SC’s surveillance. Some of the feedback we gathered from the briefing
includes the issue of management’s timeliness in reacting to the news as it would
have contained the negative speculation and the damage to the share price. While
this is understandable given the sensitivity of the issue, management could have

[ 5 ]
 approached investors earlier to clear the air.
It will take some time. Investors also raised the need for a deeper understanding of
the Indian power industry as it would help them understand better Mudajaya’s venture
there. From management’s explanation, we believe there are reasons to question the
credibility, content and motive of the poison letter. The SC’s indications of a speedy
closure of this episode should also provide some comfort although some investors
were still not fully convinced, which is understandable. It will take time for total
conviction from investors to come through.

Earnings outlook
No changes to forecasts. We retain our earnings forecasts as management
indicated that recognition of the RM3.4bn EP works should come in strongly from
3Q10 onwards given that the delivery for unit 1 will occur earliest in Sep 10. Units 2,3
& 4 will come through in 2012. We have assumed a conservative 20-25% pretax
margin for the EP works of the Indian IPP which makes up 40-60% of our FY10-12 net
profit forecasts. The 360MW Unit 1 is expected to be commissioned by mid-2011
which is on track. The group has so far recognised ~10% of the RM3.4bn EP works.
Profits from the EP works should peak toward end-2011 or early 2012.

Another strong quarter. The group’s 2Q10 results are scheduled to be released on
24 Aug. We expect 20% qoq growth in net profit from RM51m in 1Q to about RM60m
in 2Q, driven by local jobs and some recognition of EP works. We expect the
performance to be broadly in line with the quarterly earnings growth trend in FY09,
where average, core net profit rose 46% or RM9m qoq in the four quarters of FY09.
Nevertheless, we would not discount positive surprises on the margin front. Our 20-
25% pretax margin assumption for the EP works is conservative. There could also be
margin surprise from the RM900+m KLKS highway which is reaping the benefits of
steel cost savings. The project was secured with a total cost that imputed a steel cost
of ~RM4,000/tonne but was executed when steel prices had dropped to around
RM2,000/tonne. Pretax margins for this project could also exceed 20%. Recall that the
group booked 35% EBIT margin in 1Q10.

Figure 7: Segmentals (RM m)

Revenue 1Q09 2Q09 3Q09 4Q09 1Q10 yoy qoq Comments
Construction 105.4 156.2 175.4 167.3 209.7 99% 25% Contribution from India to pick up
Manufacturing 9.0 11.1 9.3 21.5 14.5 61% -33% Demand for precast expected to pick up
Trading 14.1 22.6 17.6 17.1 14.8 5% -14%
Property 4.6 3.8 5.8 14.9 4.6 -2% -70% Backed by Batu Kawah township
Total 133.1 193.8 208.2 220.7 243.4 83% 10%

EBIT 1Q09 2Q09 3Q09 4Q09 1Q10 yoy qoq

Construction 18.9 32.8 47.7 54.8 73.3 288% 34% Record high, likely to trend higher
Manufacturing 0.2 1.9 0.7 2.5 1.8 1060% -28% Demand for precast expected to pick up
Trading 0.1 1.2 1.1 0.7 0.7 480% 7%
Property 0.2 0.4 0.1 0.6 0.1 -79% -91% Demand and selling prices likely to improve
Total 19.4 36.2 49.5 58.5 75.8 291% 30%

% pts
EBIT margins 1Q09 2Q09 3Q09 4Q09 1Q10 yoy qoq
Construction 18% 21% 27% 33% 35% 17% 2% Record high, likely to trend higher
Manufacturing 2% 17% 8% 12% 12% 11% 1% Demand for precast expected to rise
Trading 1% 5% 6% 4% 5% 4% 1%
Property 5% 10% 1% 4% 1% -4% -3% Demand and selling prices likely to improve
Total 18% 23% 28% 35% 36% 18% 1%
Figures are before eliminations
Source: Company, CIMB estimates

Valuation and recommendation

Worst-case valuation looks remote. The construction business, which we value at
15x FY11 P/E, makes up 75% of our RNAV. The estimated DCF value of Mudajaya’s
26% stake in the IPP constitutes 18% of RNAV. Working on the worst-case scenario
of (i) no IPP component, and (ii) no EP profit in our construction portion, assuming
strong credibility to the claims in the letter and an unfavourable decision by the SC, we
estimate that our RNAV would be chopped 47% from RM9.92 to RM5.17, cutting our

[ 6 ]
target price from RM7.94 to RM4.14 (unchanged 20% RNAV discount). If we just
removed the IPP component but not the EP profits assuming major problems for the
commissioning of the power plant after the completion of the EP works, our RNAV
would drop to RM8.16, leading to a target price of RM6.53. If only the EP profits for
the construction component were removed but Mudajaya kept its 26% stake in R.K.M
Powergen, RNAV would drop by RM5.46, leading to a target price of RM4.37.

Figure 8: Worst-case valuations

Scenarios for RNAV Current RNAV New RNAV Current TP New TP
(RM) (RM) (RM) (RM)
Removal of IPP value and EP profits 9.92 5.17 7.94 4.14
Removal of IPP value 9.92 8.16 7.94 6.53
Removal of EP profits 9.92 5.46 7.94 4.37

Source: CIMB estimates

Figure 9: Share price chart (RM)

6.40

5.80

5.20

4.60

4.00

3.40

2.80

2.20

1.60
Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10

Source: Bloomberg

Maintain BUY. Issues discussed during the briefing and conference call tie in with our
expectations. We view positively management’s effort to address the concerns though
management could have been more timely in doing so as it would have contained the
negative speculation and the damage to the share price. We believe there are
reasons to question the credibility, content and motive of the poison letter. The SC’s
indications of a speedy closure of this episode should also provide some comfort. We
make no changes to our forecasts, BUY recommendation or RM7.94 target price,
which is pegged to an unchanged 20% discount to RNAV. Clarity on the issue with the
SC could lead to further recovery of the share price which rebounded last Friday.
Positive revelations from the briefing and conference call could aid a recovery in
sentiment. In the medium term, potential re-rating catalysts include (i) contract awards
(ii) swifter-than-expected progress of the UMPP project in India, and (iii) positive
earnings surprises. We believe that the share price has overreacted and the current
share price level presents a good buying opportunity.

[ 7 ]
Financial summary
FYE Dec 2008 2009 2010F 2011F 2012F
Revenue (RM m) 422.4 720.0 1,900.7 2,275.6 1,547.5
EBITDA (RM m) 66.5 166.4 341.9 406.8 292.5
EBITDA margins (%) 15.7 23.1 18.0 17.9 18.9
Pretax profit (RM m) 65.5 165.7 353.4 424.3 457.7
Net profit (RM m) 45.1 116.9 232.0 287.2 319.7
EPS (sen) 12.1 31.4 56.4 69.8 77.7
EPS growth (%) +65% +160% +80% +24% +11%
P/E (x) 33.1 12.7 7.1 5.7 5.1
Gross DPS (sen) 4.4 4.8 4.8 4.8 4.8
Dividend yield (%) 1.1 1.2 1.2 1.2 1.2
P/NTA (x) 5.6 4.0 2.6 1.8 1.3
ROE (%) 25.9 34.4 43.9 36.7 29.5
Net cash per share (RM) 0.27 0.50 1.06 1.76 2.53
P/CF (x) 25.6 13.1 7.0 5.7 5.1
EV/EBITDA (x) 15.0 7.1 3.5 2.3 2.1
% change in EPS estimates - 0.0% 0.0% 0.0%
CIMB/Consensus (x) 1.16 1.14 1.15

Source: Company, CIMB Research, Bloomberg Estimates

Figure 10: RNAV

Property m sq ft RM psf Stake Value
(RM m)
Jalan Bukit Ledang - Damansara Heights 0.07 250.0 100% 16.3
Commercial land in Mutiara Damansara (For HQ) 0.04 320.0 100% 13.9

RM m Stake Value
(%) (RM m)
IPP RKM Powergen, India (1,440 MW, 20 year DCF @29% WACC) 2,786.6 26% 724.5

P/E RM m Stake Value

(x) (%) (RM m)
Construction FY11 net profit 15.0 203.9 100% 3,058.6
Net current assets less property development cost (As at 1QFY10) 266.4
Long term debt 0
Total RNAV 4,079.8
Enlarged no. of shares (m) 411.2
RNAV/share (RM) 9.92
RNAV discount 20%
Target price (RM) 7.94

Source: Company, CIMB estimates

[ 8 ]
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STOCK RECOMMENDATIONS

BUY: Expected positive total returns of 15% or more over the next 12 months
HOLD: Expected total returns of between -15% and +15% over the next 12 months.
SELL: Expected negative total returns of 15% or more over the next 12 months.

CIMB-GK Research Pte Ltd (Co. Reg. No. 198701620M)

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