Jaks Hai duong thermal power plant is not far from completion, but Jaks' share price is still lackluster after falling from RM1.84 since early 2018. Why?
There has been too many bad news surrounding the stock.
3 fund raising exercises over the last 2 years with the most recent warrant rights undersubscribed by 68%, and disposal of properties to raise funds. Hence, perceived cash flow problems,
The dispute with The Star where Jaks paid RM50m Bank Guaranteed performance sum,
The delay in Pacific Star construction,
The latest Q3 results in red due to continuing losses from property segment and the slow recognition of profit from Vietnam EPC,
Mr. Koon completely disposed his 30% shareholdings in jaks due to margin calls, leading to share overhang,
Huge portion of LTIP was awarded to the CEO by way of RSP (given free), leading to criticism and call for inquiry.
These factors have done great harm to Jaks causing its price to fall from RM1.84 to RM0.50. Investors fled from Jaks largely due to poor management factor.
The biggest fall in prices was seen during the warrant right issue exercise. Personally, I agree with the two articles written by David Tan which might correctly speculate what happened.
The most recent decision by the LTIP committee to award a huge portion of RSP was not well received too but it didn’t cause the share price to fall. Why?
I have commented in I3 that the timing of RSP is good for both the company and the employees. I repost the comment here;
"In June 2016, the EGM approved the 5 years LTIP, which may be extended for another 5 years, comprising of Share option and SGP (RSP and PSP). The later are given to employees for FREE, provided that the FREE portion shall not exceed 60% of the total allocation under the LTIP. The maximum number of shares to be allotted under the LTIP is 15% (not 30% as alleged by hng33) of share capital at any given point in time during the LTIP period.
In May 2017, 24,500,000 shares were granted under the share option at RM1.40 exercise price. 12,000,000 of which were allotted to directors and has been exercised entirely.
Accounting standard IFRS 2 requires an entity to recognise share-based payment transactions (such as granted shares, share options, or share appreciation rights) in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity.
Therefore, investors would have already factor in the potential charges to P&L from the LTIP as determined by the market price and the quantum of the grant.
In this case, a very large portion of the LTIP was granted by way of RSP. Around RM19m (38m x RM0.51) will be charged to P&L in Q1 2019. The amount is not spread over a certain number of periods as all RSP are fully vested on 8 Feb 2019. This is an unusual practice as RSP usually has multiple vesting periods to encourage employees to stay longer. Why?
Andy gets 2 out of 3 shares granted, and his family members probably get majority of the balance.
I m not here to discuss ethical issues. Personally, I feel that the RSP has deviated from the purpose and intent of the LTIP which is to motivate “employees“ not bosses.
Back to the point why now and in such hasty manner? The answer, of course, lies in the benefits of such doing.
From the company’s stand point, it gets to charge off the entire RSP at around RM0.50 in one go. Otherwise, it needs to estimate the future value of the RSP which should be higher and apportion the higher charges over the vesting period causing lower profit in future financial reporting.
From recipients’ (Andy and family) stand point, the RSP grants will attract personal tax based on the market value of the grants at the point of vesting. It is likely that the grants will be valued around RM0.50, hence much lower personal tax charges compared to early 2018 when the share price was around RM1.80. If the RSP has multiple vesting periods, the recipients will have to pay higher taxes for portions vested at higher market prices in future. Thus, higher personal taxes.
Conclusion : The timing of the grant at current low price regime benefits the company in term of lower charges to P&L. It benefits the employees in the form of lower tax liabilities.
Why has Andy decided to grant a very substantial portion of RSP with just 8 days SINGLE vesting period? ..... logical thinking … Is Andy expecting the share price to continue moving higher from hereon thus taking advantage of current low price to minimize his tax payments on his RSP? "
Jaks has been very dramatic since the emergence of a substantial shareholder, Mr. koon Yew Yin who has aggressively acquired over 30% control of the company in a very short period. Mr. Koon has vast experience in coal power plant and Jaks’ power plant was the sole reason of his investment in Jaks. However, when Jaks’ share price dropped, he was forced to sell out completely due to margin calls. This has created massive share overhang and the effect is still felt today. Mr. Koon cited huge debts, poor results, and poor management as reasons for exit. He opines that jaks will continue to report losses until the power plant commences operation.
Indeed, the only thing that is keeping investors interested in Jaks is its power plant in Vietnam.
While the Vietnam power plant could be a game changer for Jaks, lack of transparency and guidance from management is keeping the investors at bay.
I have provided some information on the power plant in my previous post “Understanding Jaks Hai duong thermal power plant in Vietnam”
However, there wasn’t enough data to answer the million dollars question; “How much profit can Jaks Hai Duong power plant contribute for the 25 years after the plant commences operation?”
So, to Buy or Not to Buy? Buy now or later?
My friend told me there is too much risk now and I should wait for more clarity before buying. A classic kind of advice we will get when we ask for opinion on an out-of-favor stock.
At this juncture, the power plant in vietnam should be more than 50% completed, but Jaks is still only RM0.50+.
Jaks Hia Duong power plant. Picture taken in January 2019
Most retail investors are not capable of doing analysis by themselves. Their judgement normally follow the movement of the share price. That's herd mentality. Prices are often volatile, which means they are not likely to fully realise their investment potential and often caught in panic selling.
To be successful in investment, one must be confidence, must be patient, must not be afraid of volatility, must have a big heart for giant profit, and must not be afraid of losing money.
The management, maybe for tactical reason, has been very tight lips on the potential of the vietnam power plant. I hope after the exit of Mr Koon, conclusion of warrant exercise, and the grant of RSP, the insiders have taken the opportunity of fallen prices to secure their objectives.
Recently, Management was proactive in providing "clarity" to investors through public media.
JAKS expects its profit growth in the next two years to be “very significant” as it recognises construction earnings from the engineering, procurement and construction (EPC) contract for its coal-fired thermal independent power plant project in Vietnam, according to the group’s chief financial officer Steven Ang Si Eeng.
Andy Ang Lam Poah has, in a recent interview with The Edge, mentioned that the entire Pacific Star project will be completed in June 2019 and will not engage in property development in near future. He also confirmed that the construction segment is doing well. The company is tendering for RM500m infrastructure works in Sarawak. The US$454m Vietnam EPC contract has contributed RM600m and RM140m revenue and profit respectively until Sept 2018.
However, nothing was mentioned on the potential earnings of the power plant.
Without this piece of information, fundamental investors won't dare to touch it. Most, if not all, current financial ratios of the company are poor. You need some reliable data on the Vietnam power plant to build your case against the sell calls. So far, available information on the Vietnam power plant hinges on the structure of the concession. No information on the concession payment is available.
It will be a lot easier to just wait for the earnings from the power plant before making your decision, but you may miss the first few hundred percent returns.
For those who wish to BUY NOW, see if the following thoughts make business sense to you;
1,200MW Power plant costing RM8 billion is too big for a company the size of Jaks. It certainly requires very large capital and cash flow to bring the power plant online. Somehow, Jaks owns 30% and gets it off the ground with just RM200m initial capital outlay with balance capital requirements to be satisfied by the construction profit of the power plant. Chinese partner CPECC handles everything from construction to the cash flow management. It wasn’t a smooth journey for Jaks at all. Please read my previous post “Understanding Jaks Hai duong thermal power plant in Vietnam” to know why I said so.
A 1,200MW power plant can power up 1.2m homes satisfying the need of 6m people which is almost the population of Selangor state. At RM300 per household, it is a RM4.32billion per annum business! Definitely a big business to be reckoned with.
CPECC was willing to take full responsibility of the power plant project and let Jaks owns 30% now with option to purchase additional 10% at cost, all for just RM200m. The potential returns from the power plant must be very attractive to get CPECC interested to be a partner.
The loan tenure is 18 years and is non-recourse. Meaning the bankers cannot pursue against its borrowers should the loan defaults. The bankers must have examined the PPA to ensure that the project is profitable and able to generate sufficient cash flow to meet its loan obligations.
At present, all large-scale power plants projects in vietnam are undertaken by foreign entities. Vietnam could not have attracted so many multi billion global companies unless its terms are favorable and profitable. These projects require huge sum of capital and borrowings, the earnings must be very substantial to attract these multi-national companies.
At RM0.50 Jaks is worth less than RM300m, an amount CPECC certainly willing to pay to fully own the power plant. Jaks’ total investment in the power plant will eventually be around RM800m for 40% ownership for which Jaks only needs to pay half the sum.
Conclusion, all you need to know is that Jaks’ Hai Duong power plant is a huge project and its potential earnings must be very big. Otherwise, CPECC will not be interested. At RM0.50, Jaks is worth less than RM300m. Upon successful commencement of power plant operation, Jaks could be a potential 10 beggar investment! For now, Jaks is haunted by the property business but will be blessed with 25 years future earnings from the vietnam IPP.
As investors normally shy away from stocks which have fallen a lot, this article hopes to differential Jaks from the mass. Readers are advised to seek independent opinion before making decision. To BUY or NOT to BUY is entirely your own decision. Nothing is risk free.
Thanks for reading