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DK

Author: DK   |   Latest post: Tue, 22 Dec 2020, 11:04 AM

 

Jaks Resources - What Is The Long Term Intrinsic Value ?

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This article is written because it is the author's opinion that Discounted Cash Flow (DCF) is the most appropriate method of valuation for a company with a predetermined stream of future cash flows.

Important ! Readers are advised to gain thorough understanding of DCF valuation method before reading this article.


 

A significant new revenue stream

After successful completion of 336 hours of trial run on 17 November 2020, JHDP has commenced commercial operation of its first power plant unit on 24 November 2020, it marks the beginning of a new significant stream of  future cash flows for Jaks.

 

What is the expected free cash flow from JHDP ?

I have extracted the following information from my earlier article “Jaks Resources - The Most Reliable Earnings Guidance for JHDP

(You are advised to read the article for better understanding on the use of data from Vinh Tan 1)

https://klse.i3investor.com/blogs/Jaks%20resources/2020-05-01-story-h1506848575-Jaks_Resources_The_Most_Reliable_Earnings_Guidance_for_JHDP.jsp


Annual free cash flow = RMB1,609m = RM981m. 

Hence, potential free cash flow from JHDP attributable to Jaks.

@30% = RM981m x 30% = RM294m

@40% = RM981m x 40% = RM392m


(Caution : free cash flow is different from earnings)

 

The question is how to value this stream of FCF ?

I will evaluate the FCF using Discounted Cash Flow methodology. That is to get the sum of all present values of the cash flows that will be received in each of next 25 years.

 

What is the intrinsic value of a company ?

Owner earnings is a valuation method detailed by Warren Buffett in Berkshire Hathaway's annual report in 1986. He stated that the value of a company is simply the total of the net cash flows (owner earnings) expected to occur over the life of the business, minus any reinvestment of earnings.

To put it simply, it is the present value of all net future cash flows. The valuation method relies on the accuracy of future cash flow projection. As JHDP has a BOT contracts with Vietnam government, it has a stable and predictable future income stream for 25 years making it a well-suited candidate for discounted cash flow (DCF) valuation method.

“The purpose of DCF analysis is to estimate the money an investor would receive from an investment, adjusted for the time value of money The time value of money assumes that a dollar today is worth more than a dollar tomorrow because it can be invested. As such, a DCF analysis is appropriate in any situation where a person is paying money in the present with expectations of receiving more money in the future. DCF analysis finds the present value of expected future cash flows using a discount rate.” - Investopedia

 

So how much is 25 years of such FCF worth in today’s value ?

The stream of cash flow is discounted at Jaks' weighted average borrowing cost of 6.12% to arrive at the present values (PV) of between RM3.8 billions to RM5 billions. This is equivalent to RM2.15 to RM2.85 per share.

Figures are in millions

Year

FCF@30%

PV

FCF@40%

PV

1

300

283

400

377

2

300

266

400

355

3

300

251

400

335

4

300

237

400

315

5

300

223

400

297

6

300

210

400

280

7

300

198

400

264

8

300

187

400

249

9

300

176

400

234

10

300

166

400

221

11

300

156

400

208

12

300

147

400

196

13

300

139

400

185

14

300

131

400

174

15

300

123

400

164

16

300

116

400

155

17

300

109

400

146

18

300

103

400

137

19

300

97

400

129

20

300

91

400

122

21

300

86

400

115

22

300

81

400

108

23

300

77

400

102

24

300

72

400

96

25

300

68

400

91

Total

7,500

3,792

10,000

5,056

(A total of RM7.5 billions to be received over 25 years is worth RM3.792 billions today, and a total of RM10 billions to be received over 25 years is worth RM5.056 billions today)

 

What does this Present Value (PV) mean ?

It means if the company borrows RM3.8 billions at 6.12% fixed interest rate now, it is able to fully repay the loan plus interest costs using the future cash flow from JHDP.

 

Does it mean Jaks is worth RM2.15 to RM2.85 per share in today’s value ?

The answer is YES and NO.

YES, if the company shall cease to explore all future investment activities and return all future cash received from JHDP to its shareholders.

NO, if the company continue to invest all or part of the funds it received from JHDP in new business ventures which will generate additional revenues. Just like  YTLPOWER.

It is likely that Jaks will continue to invest part of the FCF from JHDP in new opportunities. Therefore, how much is Jaks really worth ?

Assuming a reasonable return on investment of 15%, RM3.8 billions to RM5 billions will generate RM570m to RM750m recurring annual income. This translates to EPS of between RM0.32 to RM0.43. 10x PE will value Jaks at RM3.20 to RM4.30.

Nonetheless, this is based on the assumption that the company is able to borrow using the FCF as collateral. Note that It is a common practice in Malaysia where long-term Government contracts are used to secure capital financing.

 

Conclusion

A stream of FCF of between RM300m to RM400m to Jaks for the next 25 years is worth between RM2.15 to RM2.85 per share in present value. The 25 years of FCF is more than just cash, they are sources of capital to more business opportunities !

 

Caution

It is NOT the intention of this article to INFLATE the TARGET PRICE of Jaks. It merely highlights the most appropriate method of valuation for a company with predetermined stream of long-term future cash flows.

Price earnings (PE) valuation is most popular amongst market investors as it is easily understood but less appropriate in this case.

Readers must understand that market price of a stock rarely correspond to its valuation. Hence, It is prudent to provide 30% margin of safety.

There are several assumptions made in this DCF calculation which may not be accurate. 

Therefore, readers’ discretion is strongly advised.

 

DK

Disclaimer : This article is purely for information and opinion sharing purposes. You should not make your decision based on the writing. You are strongly advised to seek independent verification and advice.

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Labels: JAKS

Related Stocks

Chart Stock Name Last Change Volume 
JAKS 0.655 +0.02 (3.15%) 13,710,600 

  18 people like this.
 
deMusangking a good read....awakening article for those who are interested!
29/11/2020 5:58 PM
gemfinder Post removed. Why?
29/11/2020 6:35 PM
Keyman188 Wahhh... if like that FCF & intrinsic value...

Then Keyman188 better invest Mega First Corp Bhd (MFCB) & Malakoff lorr...

Thanks for your advice...kekeke
29/11/2020 6:47 PM
Philip ( buy what you understand) Owners earnings work best if you actually own the company.
However, the more important question that a minority shareholder needs to ask is this, how much more right issue will be incoming to dilute the earnings per share?

In 2015 when they won the contract, shares outstanding was 400 million. Today it is 650 million, in 2021 how much outstanding shares will be capable.

On the veracity of earnings, we are hearing multiple promises. Previously, management guided to revenue earnings in the ballpark of 240 million a year.
Today the guidance is 720 million a year.


https://focusmalaysia.my/mainstream/upcoming-vietnam-power-plant-could-bring-in-over-rm720-mil-per-year-says-jaks-ceo/

With Andy ang now saying that the power plants can generate revenue of 600-700 million usd every year, who should we believe?

1. The entire list of articles and projects given by dk66 that says he has reliable calculations of earnings?
2. The upgraded projects by Andy ang in an effort to get a higher price for the rights issue?
3. The comparable returns of other power plants in the region?

The simple fact is this. The is no profit GUARANTEE given by CEO, because there is guarantee that he will act on the behalf of the minority shareholders.

So simply put: do you trust the man to do the right thing?

If so, then by all means jaks is an undervalued gem.

But here is the thing, in the past 6 months ever since covid started, if you were to buy stocks at this time, ANY stocks at all, you would have a good chance of making money.

So isn't it better to pick the stocks with the lowest risk with highest gain? There are many stocks out there other than jaks. Sure you could make money in jaks, but would the returns really compound?
29/11/2020 7:05 PM
deMusangking simple! if you doubt stay away! if u believe like i do, then go ahead!
haha
29/11/2020 7:52 PM
stockwin This alternative valuation make sense. TQ DK
29/11/2020 8:41 PM
hello_VN gemfinder, maybe you can come out with some write up or analysis?
29/11/2020 11:37 PM
stockraider Stupid answer to Philip loh...!!

Posted by deMusangking > Nov 29, 2020 7:52 PM | Report Abuse

simple! if you doubt stay away! if u believe like i do, then go ahead!
haha
29/11/2020 11:39 PM
DK DCF is the most widely used valuation method by investment bankers for power plants.

--------------------
stockwin This alternative valuation make sense. TQ DK
29/11/2020 8:41 PM
30/11/2020 12:11 AM
cheated Why director Razali Merican sold if TP true?
30/11/2020 1:55 AM
cheated Ytl Power got dividend why Jaks keep asking for money?
30/11/2020 1:57 AM
Sslee Dear DK can you just stop painting such a rosy picture to get people buy into your one sided story.
Can't you wait till next quarter result to confirm the earning potential of the power plant.
30/11/2020 6:45 AM
Sslee By the way did you attended JAKS 2019 AGM
https://klse.i3investor.com/blogs/kianweiaritcles/2019-07-08-story214175.jsp
• 建造、经营及转移 (BOT) 是一个非常强大的模式,未来相信再也看不到;Hai Duong发电厂投入运作后,预计每年可为JAKS的30%股权带来RM80-100m的盈利;将以Equity Accounted方式,也就是Associated贡献进账,不会录得营业额。
• 虽然协议以每年最低6,500营运小时计算,但是自家发电厂的设计为7,000-8,000小时;必须强调,衡量发电厂的效率并非参考营运小时;这项数据只是用于计算协议价值。
• 如果有资金能力,当然有兴趣收购发电厂额外10%股权,也就是将30%股权提升至40%;10%股权预计值得USD50-60m,相等于RM220-250m;如果决定收购,肯定必须向股东们筹资。
• 现阶段优先专注于发电厂的建筑活动,并寻求提早完工;如何重组发电厂的融资,减少贷款利息,以及提升未来利润,将是JAKS的首要考量

“Jaks Resources - The Most Reliable Earnings Guidance for JHDP”
Annual free cash flow = RMB1,609m = RM981m.
Hence, potential free cash flow from JHDP attributable to Jaks.
@30% = RM981m x 30% = RM294m
@40% = RM981m x 40% = RM392m

Are your Most Reliable Earnings Guidance for JHDP more reliable than what is been told in JAKS 2019 AGM?
30/11/2020 7:09 AM
DK Dear Sslee, which part of the article is misleading ?
30/11/2020 7:15 AM
Sslee @DK
The rosy picture of 30% = RM981m x 30% = RM294m.
What if the actual is much lower are you going to take responsibility?
30/11/2020 7:18 AM
Sslee Compare to 2019 AGM:建造、经营及转移 (BOT) 是一个非常强大的模式,未来相信再也看不到;Hai Duong发电厂投入运作后,预计每年可为JAKS的30%股权带来RM80-100m的盈利;将以Equity Accounted方式,也就是Associated贡献进账,不会录得营业额。
30/11/2020 7:26 AM
DK Sslee, who will take responsibility in i3 ? Are you ? Why do you discourage sharing of opinion ? Must everything shared be judged by you ? Is QL valuation reasonable ?
30/11/2020 7:29 AM
DK Sslee, If the profit exceeds Rm80-100m, are you going to apologize ?
30/11/2020 7:36 AM
DK If the profit from JHDP is ONLY RM100m, I will apologize to all the readers.
30/11/2020 7:47 AM
Sslee Dear DK,
No need to be so emotional. Wait for the next Quarter result.
If any one need to apologize it is the Board/ALP/CFO for giving confusion information.
30/11/2020 8:26 AM
deMusangking Sslee@
dun be a sour grape!!!
u talk so much about insas and yet u r trapped in it!
this is a wake up call- sellur insas and buy Jaks!!!

haha
30/11/2020 8:32 AM
coolio Lol, sour grape sslee
30/11/2020 8:33 AM
deMusangking buy Jaks! then u will be a sweet grape!!!
hahaha
30/11/2020 8:35 AM
DK Dear Sslee,

You can't blame the BOD/ALP/CFO for giving conservative guidance. I already laid out my reasons for taking vinh Tan 1 as earnings guidance. RM294m represents free cash flow not earnings. DCF calculation is based on FCF instead of earnings. That is why I advised readers to understand DCF before reading this article. I believe I have given sufficient warnings in my article.
30/11/2020 8:51 AM
DK I have included the following statement in the article to avoid confusion.

(Caution : free cash flow is different from earnings)
30/11/2020 8:58 AM
stockwin I think DK is pretty clear with his valuation and assumptions.It is up to readers to make up their mind.If not for DK, no one would write anything about the power plant project here. I for one would not have invested in Jaks and missed the opportunity.Even if his figures is way off, I would not blame him as the assumptions are there for you to think and decide.
30/11/2020 11:28 AM
DK stockwin, thank you for your understanding. Valuation in this article is derived using DCF with certain assumptions. I can't simply ignore it because the results is "too high" or "unbelievable".

Points in the article to challenge are;
1. DCF is not the most appropriate method of valuation
2. RM300m FCF based on Vinh Tan 1's results is inappropriate
3. Using Jaks' weighted average borrowing costs of 6.12% as discount rate is inappropriate
4. Assuming FCF will be reinvested in new opportunity is baseless
5. Assuming constant FCF for 25 years is too simplistic
6. Using Present value as stock valuation is inappropriate
7. Insufficient warnings

I hope more readers can think and behave like stockwin. Take responsibility for your own decision.
30/11/2020 1:17 PM
Philip ( buy what you understand) I think if anything DK is bring TOO conservative. According to the latest projections by ALP, the power plant is projected to have a revenue of 720 million a year at 30% ownership. According to him, 1200mw plant can generate 600-700 million usd a year.

So no need to begrudge him, dk is doing a good job in getting figures on paper.

It is only a few more months away, let us just wait and see if the results garnered by dk projections is going to be worth waiting 3 year for it.

You yourself had already bought it before as well.

>>>>>>>>>>


Sslee @DK
The rosy picture of 30% = RM981m x 30% = RM294m.
What if the actual is much lower are you going to take responsibility?
30/11/2020 7:18 AM
30/11/2020 7:17 PM
DK The revenue figure given by ALP is similar to Vinh Tan 1's revenue for 2019 of about USD650m.
30/11/2020 8:14 PM
winston1 With all the negative news thrown on ALPs RI, many have made good sum of money. In the end the negative news become a positivity to many.
30/11/2020 9:39 PM


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