Saturday, March 4, 2017

JAKS: Great idea but is it great execution?

I have to give it to Mr Koon Yew Yin. He sees a good company with a very good project. Basically, Jaks Resources without the power plant project is an average company but with the IPP project it is a more than an average company with an attractive price.

What has it gotten with the IPP in Vietnam? Basically as below, a BOT (transfer - after 25 years) project and its partner CPECC has bought into the project by funding a huge portion of it.

What JAKS has to do now (which it has done) is to fulfill its portion by coming out with USD140.14 million while CPECC will come out with the other portion. In addition, CPECC will build the bulk of the project and come out with Redeemable Convertible Preference Shares (RCPS) to fulfill the equity portion. (On top of that, the RCPS comes with zero dividend costs) CPECC has also gotten the financing for the project as well with its corporate guarantee. It should be noted that CPECC is huge power plant consulting company in China. Its parent, China Energy Engineering is a HKD43B company, which means and says a lot.

The structure is as per below:

Ultimately, JAKS can own up to 40% of the project and it now has a partner whom can deliver. On top of that, it gets a substantial portion of work which can be translated into construction profits from this project.

Do I have reason to believe it can be delivered? Yes.
Do I have reason to trust the project has decent to good return? I should think so considering the interest from CPECC. It has country risks obviously, but this one sounds to be more secure.

Now, all that is good as if it is able to secure good IRR, this basically is a great investment with Jaks trading at about RM535 million valuation. (Jaks has mentioned of it eyeing at least a 10% IRR.)

With that, it is definitely not wrong for a person who understands construction to wallop - and wallop he did. Another point to note is that the controlling shareholder - Mr Ang Lam Poah only owns around 8% to 9% of the company on paper. (I would tend to think he definitely has supports from his other friendly shareholders.) What Mr Ang did wrong was that he took a long time to accumulate the shares, probably thinking of getting them at cheap - below RM1.

Seeing opportunities (probably), Mr Koon Yew Yin bought the shares in a very quick manner and in the process, accumulated more than 11% over a short period of time. (Mr Koon is now, the single largest shareholder) At the point of him becoming a substantial shareholder, it triggered the attention of Ang's group, I believe. Jaks announced an unusual quarterly 31 Dec 2016 loss and at the same time, announced that it is to do a 10% private placement.

KYY's holding has increased to 11.7% by 1 March 2017
Does Jaks has enough bullets to defend the onslaught? I should think so. It has many defensive tools to do that - and it has already done so by announcing a private placements. Private placements as we know can go to friendly parties. Basically, Jaks can do many more of private placements and as long as Koon does not acquire enough to take control - he can't do much. (That has been proven in the case where QL was unable to takeover Lay Hong, and QL I would think is even deeper pockets, but they can't do much.)

Can Mr Koon do much? We shall see. And I do not think he is keen to takeover anyway - as the project is for Mr Ang to lose (he is the person, whom have worked hard to pull everything together), moreover Koon is not in the right age to do that. A new management could jeopardize the project.

Mr Koon's past records have been more of a short to medium term investor - come in - make a kill and go. With that, (I would think) Mr Ang has reasons to be afraid and not to entertain much requests. The ball is in Ang's court to play and decide how to play.

(You see, if I have Warren Buffett as my shareholder, I should feel proud. But, if I have Carl Icahn as my shareholder - I would put on more defences surrounding me, because of animal instincts. In this case though, activists investing may not work well.)

Will someone like Mr Koon ask for a favourable return from the shares? Almost a surety. Why would he invests into Jaks anyway? - and this manner of buying.

The biggest question is - if Jaks current controlling shareholders do not want to play ball - the shares can be stuck at RM1.10 to RM1.30 for a long time - something that a shorter term shareholder would not want! It could end up being you buy to push up your own share price. You can buy but you cannot sell at a profit.

One thing for sure (unless with a deal being made, the private placements may not be that cheap - at least not the type of price which Ang and his group have been buying at i.e. around RM1 - and the way Mr Koon has been buying.)

This is quite interesting turns out and a lesson to note in the long term.


yauwenchin said...

1) Disregard the price actions, does the deal looks too good to be true? People in this industry told me, this size of project is about USD1bil to USD1.3bil, JAKS gets it for USD2bil.

2) with effect from 1 Feb 2017 (no par value share), all share premium will be capitalise into share capital. JAKS private placement is interesting, the existing owner may get more than K, depending on price issued.

felicity said...

Hi YauWeiChin

Thats why Kyy is buying aggressively. Not sure, what it is all about on the aggressive purchase. What do you mean that the size of project is USD1 - 1.3 billion? Overpriced?

yauwenchin said...

Yes, for a 2x600MW thermal coal run IPP, he told me it cost about USD1.0b to USD1.3b. JAKS got it for USD2.0bil. That's why I said it almost sound too good to be true, after I saw zai zai comments on the detail conditions. Common sense tells me that the Vietnam MOIT is so generous, extend 3-4 times for JAKS until they found a bankable partner. Please don't take my word for it, I did not verify my friend's word. But I do know he has done thermal IPP before. Perhaps the specs are diff.

yauwenchin said...

Sorry my bad. Read the text wrongly. For JAKS IPP, it should range from USD1.2b to USD1.56b. JAKS got it for USD1.87b. About 20% to 56% higher. At time of award, with JAKS financial status (2008/9), is far from able to carry out such a size of the project. Some say AKS is street smart....

felicity said...

Thanks. Perhaps that USD1.87b most of it transferred to China Power Consulting

yauwenchin said...

AKS is street smart, but I don't believe CPEEC is a push over either. Let's us hope the "extra" is enough for everyone. And hope that this love story end up with WIN-WIN-WIN-WIN (AKS-KYY-CPEEC-INVESTORS) in the long run. This will be an interesting story to follow. Btw, thanks for the story/article. This case will decide who will prevail, business sense or common sense.

abir said...
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