PP 7767/09/2010(025354)

14 April 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Com pany Upda te

14 April 2010
MARKET DATELINE

JAKS Resources Share Price :

Fair Value :
RM0.83
RM2.00
Powering Up Not Rated

Table 1 : Investment Statistics (JAKS; Code: 4723) Bloomberg: JAK MK

Net Net
FYE Turnover Profit EPS# Growth PER C.EPS* P/NTA ROE Gearing GDY
Oct (RMm) (RMm) (sen) (%) (x) (sen) (x) (%) (%) (%)
2009A 278.1 -6.7 -1.5 NM -53.9 - 1.3 -2.5 0.2 -
2010F 402.0 11.1 2.5 >100 32.9 2.4 1.3 3.9 1.3 -
2011F 502.0 16.3 3.7 47.5 22.3 3.9 1.2 5.4 1.3 -
2012F 602.0 22.2 5.1 35.9 16.4 5.9 1.1 6.8 1.2 -
Main Market Listing /Trustee Stock/Non-Syariah Approved Stock By The SC * Consensus Based On IBES Estimates

♦ JAKS = water + more. We note that JAKS has primarily been identified Issued Capital (m shares) 438.4
with the water sector, including construction of water infrastructure projects Market Cap(RMm) 363.8
Daily Trading Vol (m shs) 9.0
and the manufacture of steel pipes and steel hollow sections. Although the
52wk Price Range (RM) 0.435 – 1.08
water business is still important, we believe JAKS has been very busy over
Major Shareholders: (%)
the last year spreading its wings to property and power.
KPS 12.5

♦ Re-rating catalysts. We believe JAKS’ outlook is about to change for the

Ang Lam Poah 6.1
Original Invention 5.7
better, given three major positive developments since Mar, which in our
view will improve its financial position from FY10/10. These include: FYE Oct FY10 FY11 FY12
EPS Revision (%) - - -
1. The joint development agreement by 51%-subsidiary Jaks Island Circle Var to Cons (%) 5.2 -4.6 -14.3
(JIC) and Star Publications to develop a piece of land in Petaling Jaya;
Share Price Chart
2. Letter of award for construction of the Paya Peda Dam in Besut,
Terengganu for a total contract sum of RM333m; and

3. Memorandum of Agreements with various Vietnam authorities for a

2x600 MW coal-fired power plant in Hai Duong province near Hanoi. We
believe the PPA has also been confirmed with Electricity of Viet Nam
(EVN), which is Vietnam’s national power utility.

♦ Vietnam IPP to be a future earnings booster. EVN’s planting

programme involves nearly 17k MW of new capacity (+64%) between 2010 Relative Performance To FBM KLCI
and 2015. As the first foreign-owned IPP in Vietnam, and upon successful
completion of this power plant in FY15, we believe JAKS will be in the
running for other IPP projects there. From this first IPP, we estimate an JAKS Resources
incremental net profit of around RM52.7m in FY16, or 5x of our projected
FY10/10 net profit of RM11.1m.

♦ Risks. 1) Escalating construction material costs; 2) Lack of pricing power FBM KLCI
for pipe manufacturing, especially in relation to steel costs; 3) Pipe mill
utilisation rate is dependent on water infrastructure projects (but we
highlight that states other than Selangor appear to be moving ahead); 4)
Operating risks in Vietnam (although the PPA and expected government Chye Wen Fei
guarantees for offtake and coal supply will reduce the financial risks); 5) (603) 9280 2172
Funding risk for the IPP project as JAKS may need to borrow as well as chye.wen.fei@rhb.com.my
raise some equity financing.

♦ Investment case. We believe the market has yet to fully reflect JAKS’
power plant venture in Vietnam, which alone is worth RM676.8m or Yap Huey Chiang
RM1.54/share based on DCF. We thus estimate a SOP fair value for JAKS of (603) 9280 2171
RM2.00, which implies an upside of 141% from current levels. yap.huey.chiang@rhb.com.my

Please read important disclosures at the end of this report.

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 14 April 2010

JAKS = Water + New Businesses

♦ Background. Established since the 1960s, JAKS is primarily involved in the water sector-related business, which
includes the construction of water infrastructure projects and the manufacturing of steel pipes and steel hollow
sections. Both construction and pipe manufacturing divisions have been collectively contributing to JAKS’ total
revenue since FY10/07 (see Chart 1).

Chart 1: JAKS’ Revenue Breakdown (FY10/07-09)

RM m
300
16.3 11.3
250
13.0
105.2
200
153.3
77.5

150

100
160.7
142.8
113.4
50

0
FY07 FY08 FY09

M anufacturing Co nstructio n Trading

Source: Company

♦ Affected by slow progress in upgrading of Malaysia’s water infrastructure. With the apparent political
standoff in various opposition-led states, especially Selangor, water infrastructure projects have been slow to take
off, and this had a domino effect on construction jobs, which in turn affected the demand and selling prices for
water pipes and water-related equipment. JAKS’ financial performance over the last two years clearly reflected this
slowdown.

♦ New catalysts. However, we believe the outlook is about to change for the better, given three major positive
developments since Mar, which in our view will improve its financial position from FY10/10. These include:

1. The joint development agreement entered by its 51%-owned subsidiary Jaks Island Circle (JIC) with Star
Publications to develop two office towers, a commercial cum educational block, and a 15-storey residential
block, located along Jalan University in Section 13, Petaling Jaya. The project is estimated to have a total gross
development value (GDV) of RM370m. JAKS will also undertake the construction of this property project. The
project was announced on 3 Mar;

2. The receipt of the letter of award to undertake the construction of the Paya Peda Dam in Besut, Terengganu for
a total contract sum of RM333m. The contract was announced on 18 Mar; and

3. The recent Memorandum of Agreements (MOA) signed with various authorities in Vietnam for the construction
of a 2x600MW coal-fired power plant in Hai Duong province, around 80km east of Hanoi. The MOAs were
signed on 9 Apr.

♦ Improved earnings visibility for next 5-6 years. We note that the three projects will progressively boost
earnings over the next 5-6 years, with construction for the Terengganu dam coming in first (2010-2011), followed
by the Star property project (2010-2016), and the Vietnam IPP (2014-2015). We have remained very conservative
on the pipe manufacturing division, assuming just 30% capacity utilisation and continued losses through
1HFY10/10.

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Star Property

♦ Property development earnings to provide a medium-term cushion. Under the joint development agreement
entered by JIC with Star, JIC is entitled to saleable office units, with minimum GDV of RM259m, while Star is
entitled to the remaining GDV of RM111m. Any upside to the GDV will be shared between JIC and Star on a 70:30
basis.

♦ Long-term lease for commercial cum educational block to UTAR. JIC will grant a right of first refusal to
Universiti Tunku Abdul Rahman (UTAR) to enter into a lease of up to 25 years for the UTAR block, at a monthly
rental of RM2/sq ft and monthly service charges of RM0.20/sq ft for the first three years of the initial lease period.

♦ Some assumptions. We have made some assumptions on the project as well as subsequent lease to UTAR:

1. Construction for the UTAR block to be completed by end-FY10/13 while full completion of the project is
expected by end-1HFY10/16 (or a period of 60 months as stated in the company’s announcement);

2. The 24,568 sq metre land is built up with a net plot ratio of 1:3.5, and assuming 24% and 38% of the built up
area goes to Star and UTAR, while the remaining 38% are for the saleable units; and

3. Effective tax rate of 25%.

♦ The estimated total GDV of RM370m for the office and residential towers (based on the land area of 24,568 sq
metre, net plot ratio of 1:3.5) implies a selling price of RM400/sq ft, which we believe, is fair compared to other
commercial developments in the vicinity (see Table 2). Given the much higher plot ratio of 1:6 for new commercial
developments in the vicinity (eg. PJ 33), we believe JIC can potentially raise its net plot ratio for the development
project to at least 1:5. The potential increase in plot ratio (based on a selling price of RM400/sq ft) will raise the
total GDV for the project by 43% from RM370m to RM530m, which will in turn raise JAKS’ 51% share of the GDV
for the two commercial blocks (after excluding the two blocks for Star and UTAR) from RM72.0m to RM102.8m (see
Table 3). As for rental, our estimates indicate that the UTAR block lease will contribute a net profit of approximately
RM2.8m (based on JAKS’ stake of 51%) from FY10/14.

Table 2: Recent Transactions Concluded in Petaling Jaya

RM/ sq ft
Nestle House 375.0
CP Tower 637.0
PJ City (one 6-storey building) 440.0
HSBC Building in Section 13 389.0
Block B of Glomac Business Centre 463.0
Office blocks in Kompleks Kelana Jaya Point 480.5
Source: Companies’ announcements; Regroup

Table 3: Potential Increase to GDV

Based on Plot Ratio of:
1:3.5 1:5.0
Total built-up ('000 sq ft) 925.6 1,322.2

Star ('000 sq ft) 220.0 314.3

UTAR ('000 sq ft) 352.8 504.0
2 commercial blocks ('000 sq ft) 352.8 504.0

Selling Price (RM/sq ft) 400 400

GDV on the 2 commercial blocks based on JAKS’ 51% stake (RMm) 72.0 102.8

Source: RHBRI

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 14 April 2010

Construction

♦ Unbilled construction orderbook more than tripled to over RM800m. The recent award of Paya Peda Dam
project (contract value of RM333m), coupled with the Star property project in Petaling Jaya (estimated construction
cost of RM280m) in Mar have more than doubled JAKS’ total unbilled construction orderbook to over RM800m (see
Table 4) from RM200m two months ago. Apart from its existing orderbook of over RM800m, we understand that
JAKS is close to secure another job for the construction of a property development project in Subang Jaya, worth
about RM500m, and this could potentially boost JAKS’ construction orderbook to over RM1.3bn.

Table 4: Total Unbilled Construction Orderbook

RMm
Projects secured:
Sabah 150.0
Property development project in Section 13, Petaling Jaya 280.0
Paya Peda Dam in Besut, Terengganu 333.0
Other small projects 50.0
813.0

Potential projects:
Construction of a property development project in Subang Jaya 500.0
1,313.0

Source: Company

♦ … and more to come. Given the upcoming announcement of the 10MP in mid-2010, coupled with the
Government’s strong efforts in promoting Private Funding Initiatives (PFI), we believe more projects are likely to
get off the ground. This will in turn boost JAKS’ construction orderbook. As it stands, we believe the launch of the
Pahang-Selangor Interstate Water Transfer project last week is a good indicator that things are beginning to move
again. Therefore, even though the Selangor portion of this project may remain doubtful in the near term, we
believe the Pahang portion will begin to translate into new pipe orders soon. We highlight that JAKS is one of only
two companies in Malaysia with the capability to produce large (3m) diameter steel pipes for water transmission.

Gaining Power

♦ Signing up for an IPP project in Vietnam. On 9 Apr, JAKS signed Memorandum on Agreements (MOA) with
various authorities in Vietnam for the construction of a 2x600MW coal-fired power plant in Vietnam. The signing
was witnessed by the Prime Ministers of Malaysia and Vietnam. We were also invited by JAKS to attend the signing
ceremony in Hanoi. The MOAs included:

o A Build-Operate-Transfer (BOT) contract with the Ministry of Industry and Trade (MOIT) for the right to
implement the power project.

o A 25-year Power Purchase Agreement (PPA) with Electricity of Viet Nam (EVN) the state-owned national power
utility.

o A coal supply agreement with Vinacomin, the state-owned entity for coal resources.

o A land lease agreement with the Hai Duong provincial government for the lease of the project site for a period
of 25 years.

♦ Already in advanced stages. Although the MOAs suggest that the project is still at an early stage, we believe the
project details and PPA have already been agreed and confirmed after 17 months of negotiations by the
management. Some key considerations for the PPA include the tariff (which we expect to follow the main
characteristics of the Malaysia PPAs i.e. a fixed capacity charge and an energy charge which will cover fuel cost and
likely to be 100% passed through to EVN), as well as the operating currency (which we expect to be in USD given
the recent devaluation of the Vietnam Dong) and government guarantees (against default by EVN and Vinacomin).
We note that Malaysia’s Janakuasa (which is related to the unlisted Teknologi Tenaga Perlis) is also eyeing a
1,200MW coal-fired power plant in Southern Vietnam but remains at the MOU stage. Other international players

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also looking at coal-fired IPPs include US-based AES (1,200MW), Korea’s Taekwang Group (2,400MW), UK’s
International Power together with Japan’s Sojitz (3,600MW).

♦ Target COD in 2014-2015. Construction of the power plant is slated to begin in 4Q10 and the commercial
operation date (COD) for the first unit of 600 MW is scheduled for 4Q14 while the second 600MW unit will follow in
2Q15. The 25-year concession will start on the COD for the second unit in FY10/15.

♦ China Huadian to build the power plant. The Engineering, Procurement and Construction (EPC) contract for the
power plant was awarded to China Huadian Engineering, a subsidiary of China Huadian Corporation, which
ultimately owns and operates 180 power plants throughout China with combined installed capacity of some
80,000MW. In addition, given its lack of experience in power plant construction, JAKS also appointed Fichtner
(Germany’s largest independent firm of consultant engineers) as the owners’ engineer to oversee the construction
work.

♦ Coal supply and cost pass through. Importantly, 100% of the thermal coal requirement will be supplied by
Vinacomin, the state-owned entity for coal resources from nearby coal mines for the entire 25 years, and the cost
of fuel is fully passed through to EVN under the PPA. While there are differing estimates of the country’s coal
reserves, ranging from 100m to 2,500m metric tonnes, we note that state-owned Vinacomin (Viet Nam Coal and
Mineral Industries Group) has warned that Vietnam would still have to import coal from 2012 due to rising demand
of around 32-44m tonnes p.a. by 2014-2015 from thermal power plants. This could present a risk to Vinacomin as
the coal supplier to the project, and to EVN which will bear the cost of the fuel. JAKS’ risks are mitigated by the coal
supply agreement and the fuel cost pass through under the PPA.

♦ Likely to look for equity partner. Given the huge capital investment required for the power plant (estimated at
approximately US$1.8bn or nearly RM6bn), its current financial footing (with net gearing of 0.25x as at 31 Jan 10)
and the lack of experience in managing power plants, we believe JAKS will likely look for a strong equity partner.
We note that there appears to be no shortage of willing partners for IPP projects in Vietnam, and as we highlighted
above, international power companies from US, Europe, Japan and Korea are currently also negotiating power
projects there. We also note that JAKS’ EPC contractor for the power plant, China Huadian Engineering is ultimately
owned by China Huadian Corp which itself is a huge power player – we would thus not rule out the possibility that it
may be interested to participate in the equity. For JAKS, in order to ensure that its net gearing does not exceed
1.5x (that is the critical level for most manufacturing companies in Malaysia), we believe its stake in the power
plant will have to be pared down to below 40% (see Chart 2).

Chart 2: Potential Net Gearing Level, Assuming JAKS’ Different Equity Stake in the Power Plant Project

RM m ( x)
1,800 4.0

1,600 3.5

1,400 3.0

1,200 2.5

1,000 2.0

800 1.5

600 1.0

400 0.5
J A KS ' e quit y s t a k e 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% 25%

Net debt Net gearing

Source: RHBRI

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 14 April 2010

♦ Significant boost to earnings from FY10/16. We believe this IPP project will significantly boost JAKS’ earnings
base upon commercial operation in 2014-2015. Based on our tentative estimates, the power plant in Vietnam will
contribute incremental net profit of approximately RM52.7m in FY10/16, which is about 5x our projected net profit
of RM11.1m in FY10/10, assuming:

1. JAKS will eventually pare down its stake in the power plant project from 100% to 35% that is within its comfort
zone (see Chart 2);

2. Annual power output of 7,800m kWh, as per the company’s announcement to Bursa. This implies the plant will
have to make available at least 75% of the installed capacity, although the shortage of capacity in Vietnam will
likely result in a higher output;

3. EBITDA margin of 50% that is in line with power plant operators’ EBITDA margin range of 40-50%; and

4. To be conservative, a tax rate of 10%, in line with the specified tax rate for BOT projects in encouraged sectors
such as infrastructure. We understand that Vietnam provides tax incentives for power projects and this could
potentially bring down tax rate for the project further; and

5. We have also assumed an IRR of 12% for our DCF model in line with later IPP projects in Malaysia.

♦ Potential for more power projects? We believe JAKS’ successful completion of this IPP project will strengthen its
bid for other power projects either in the same location or in new areas. We note that EVN’s planting programme
between 2010 and 2015 will raise its installed capacity by 64% or 17,000MW, while the PDP6 has targeted an
additional 34,100MW of installed capacity in Vietnam over the same period. While this may appear overly
aggressive, we highlight that electricity demand in Vietnam is projected to grow by more than 10% p.a. over the
next five years.

Risks

♦ Risks to our view. 1) Escalating construction material costs; 2) Lack of pricing power for pipe manufacturing,
especially in relation to steel costs; 3) Pipe mill utilisation rate is dependent on water infrastructure projects (but we
highlight that states other than Selangor appear to be moving ahead); 4) Operating risks in Vietnam (although the
PPA and expected government guarantees for offtake and coal supply will reduce the financial risks); and 5)
Funding risk for the IPP project as JAKS may need to borrow as well as raise some equity financing.

♦ Mitigating factors. As discussed above, we believe water projects may be starting to move again, which implies
new construction jobs and supply of pipes. In any case, with an orderbook of more than RM800m, the construction
division will likely be busy. While the pipe manufacturing division will likely remain loss making in the 1HFY10/10,
as old inventory is cleared, there is a strong likelihood that there will be orders for JAKS’ steel pipes for the Pahang-
Selangor interstate water transfer project. As for the risks in Vietnam, we believe the company has covered most of
the financial risks via the PPA, as well as the government guarantees for offtake and coal supply.

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Earning Forecasts & Assumptions

♦ Earnings forecasts. We project JAKS to return to the black in FY10/10 with a net profit of RM11.1m, underpinned
by higher construction revenue arising from the two recent projects secured. For FY10/11-12, we are projecting
JAKS’ net profit to improve further to RM16.3m and RM22.2m respectively, underpinned by higher construction
revenue.

♦ Assumptions. In our FY10/10-12 net profit forecasts, we have assumed:

1. Utilisation rate at JAKS’ manufacturing division to maintain at 30%, as we have yet to factor in potential
demand coming from the Pahang Selangor Interstate water transfer project that will require 24km (equivalent
90,000 tonnes) of large diameter (3 meter) pipes, which could in turn boost JAKS’ utilisation rate from 30% to
45% over the next three years. Also, we note that selling prices and margin of these large-diameter pipes are
also higher relative to the conventional pipes, given the limited competition in the domestic market; and

2. JAKS to secure RM300m worth of construction jobs each year, with an EBIT margin of 7.5%.

Valuation & Recommendation

♦ Valuation. At current share price of RM0.83, we believe the market has yet to fully reflect JAKS’ power plant
venture in Vietnam, which alone is worth RM676.8m or RM1.54/share based on discounted cash flow. Given that
both its property and power plant ventures’ earnings will only start from FY10/14-15, we believe it makes more
sense to value the company using “sum of parts”. On this basis, we estimate a fair value for JAKS at RM2.00 (see
Table 5), which suggests a huge upside of 141%. Our “sum of parts” valuation includes JAKS’ construction,
manufacturing and trading businesses at 10x FY10/10 PER, rental income from UTAR at discounted cash flow
(DCF), land development in Section 13, Petaling Jaya at RNAV, and power plant venture in Vietnam at DCF.

Table 5: “Sum of Parts” Valuation

RMm Methodology
Construction, manufacturing & 110.6 PER 10x FY10/10 net profit, at the lower-end of our benchmark 1-
trading year forward target PER of 10-14x for the manufacturing and
construction sectors' of 10-14x to reflect JAKS' relatively small
market capitalisation
Rental income from UTAR 18.5 DCF Discount rate of 11.1%, effective tax rate of 25%, and a 25-year
lease.
Value in PJ Land 72.0 RNAV Selling price of RM400/sq ft, Net plot ratio of 1:3.5, and JAKS'
effective stake of 51%.
Power plant venture in Vietnam 676.8 DCF WACC of 9.9% and JAKS to pare down from 100% to 35%.
877.8
Issued shares (m) 438.4
Sum-of-parts value/share (RM) 2.00

Source: RHBRI

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Table 6: Earnings Forecasts Table 7: Forecast Assumptions

FYE Oct (RMm) 2009A 2010F 2011F 2012F FYE Dec 2010f 2011f 2012f

Revenue 278.1 402.0 502.0 602.0 Manufacturing Division

- Manufacturing 113.4 192.0 192.0 192.0 Utilisation rate 30% 30% 30%
- Trading 11.3 10.0 10.0 10.0
- Construction 153.3 200.0 300.0 400.0 Construction Division
New orderbook (RMm) 700 300 300
EBITDA 6.6 25.4 32.9 40.4 Run rate (RMm) 200 300 300
Depreciation & amort -3.4 -3.6 -3.7 -3.7 EBIT margin (%) 7.5 7.5 7.5
Operating profit/ (loss) 3.2 21.8 29.3 36.8
Finance costs -5.6 -7.0 -7.5 -7.2 Vietnam IPP
Pretax profit/ (loss) -2.4 14.8 21.8 29.6 WACC 9.9%
Taxation -4.0 -3.7 -5.4 -7.4 JAKS’ stake 35%*
Minority interests -0.4 0.0 0.0 0.0 * Assuming JAKS will eventually pare down its stake in the
Net profit -6.7 11.1 16.3 22.2 Vietnamese power plant venture from 100% to 35%
Source: Company data, RHBRI estimates Source: RHBRI estimates

Chart 3: Jaks Technical View Point

♦ After falling below the key RM0.84 support level in
Aug 2009, the share price of Jaks had been trading
under strong selling pressure.

♦ Even with a powerful rebound in Jan 2010 to

RM0.875, the stock fell back to below RM0.84.

♦ However, only in early Apr, the stock managed to

penetrate the key hurdle.

♦ It shot up to a high of RM0.925, near a resistance

level at RM0.95, but triggered a sharp correction in
recent trading to RM0.83, with three bearish
candles in a row.

♦ Technically, the stock must recover to above the

RM0.84 level soon, in order to maintain the positive
sentiment from the breakout of RM0.84 recently.

♦ Upon successful technical rebound, possibly from

the supportive 40-day SMA near RM0.80, the stock
could recharge its upward momentum towards
RM0.95. Higher resistance levels are at RM1.08 and
RM1.20.

IMPORTANT DISCLOSURES

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may from time to time have an interest in the securities mentioned by this report.

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher
risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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