Sunday 11 October 2020

JAKS: The Beginning of A New Chapter

After a few changes, Jaks has finally fixed the entitlement basis of its rights issues with warrants.

Before this on 9th September 2020, Jaks released a circular to shareholders in relation to its rights issue and it seems like the management revised it again.

The "illustrative" rights share and warrant entitlement has changed to 3 rights shares for 1 ordinary share held, together with one "free" warrant for every 2 rights shares subscribed. 

The illustrative issue price for each rights share has been reduced further to 12sen from 22.5sen.

Such plan will see a substantial increase in Jaks outstanding shares from 0.65 billion up to 3.2 billion before the new warrant conversion, and 4.4 billion after full warrant conversion!

Luckily, that was not the final plan.

The final entitlement basis is similar to its second plan, just minor changes to its rights share price and warrants ex-price.

To recap, below are the previous plans: 

The first plan: 4 existing shares entitled to 2 rights shares (40sen) with 1 warrant.
The second plan: 5 existing shares entitled to 8 rights shares (22.5sen) with 4 warrants (ex 50sen).
The third plan: 1 existing shares entitled to 3 rights shares (12sen) with 1.5 warrants (ex 28sen).
The final plan:  5 existing shares entitled to 8 rights shares (22sen) with 4 warrants (ex 49sen).

So, there will be maximum 1.292 billion rights shares and 646mil new warrants to be issued.

We know that this won't be the case as not all existing warrant B and LTIP will be converted into Jaks shares before the exercise.

Currently the issued number of shares in Jaks is at 675 million, which I think includes the recent LTIP offer of 20mil shares. 

Lets say if 675 million shares subscribe fully to the rights, then there will be 1080 million rights shares and 540 million new warrants after the exercise.

The total mother shares will increase to 1.755 billion before new warrants are exercised.

Last month, Focus Malaysia reported that according to Jaks CEO, "A power plant generating 1200MW can easily see a revenue of USD600mil to USD700mil a year, which comes to RM2.4bil to RM2.8bil." 

"With Jaks owning 30% of the power plant, this translates to a revenue of about RM720mil a year." 

This figure of RM720mil is based on the lowest RM2.4bil. If we use the mean of RM2.6bil, 30% share will be RM780mil.

After this report came out, Jaks share price once shot up 26% from 76sen to 96sen in a day, only to drop back to around 80sen later.

Is the CEO's estimation match DK's valuation base on Vinh Tan 1's results?

From the table above, Vinh Tan 1's annual revenue is RMB 4.51 yuan (RM2.74 billion) which is consistent with CEO's estimation of between RM2.4bil to RM2.8bil.

If Jaks's Hai Duong power plant has similar efficiency as its counterpart Vinh Tan 1, then it can bring RM200mil net profit to Jaks annually base on 30% share, and RM260mil net profit base on 40% share.

Since Jaks's stake in the power plant is 30-40%, it should be classified as an associate company. Jaks will not include the revenue from the power plant in its income statement. It can only register profit from investment in associates.

With this finalized rights share and warrant entitlement basis, and assume Jaks share price on ex date is 90sen, then adjusted share price after ex will be 48sen.

(5 x 0.90) + (8 x 0.22) = 13p + 4 (p - 0.49)

p = 0.48

This is just my own calculation and it might not be accurate.

If total paid-up shares of Jaks after rights issue is 1,755 million (as calculated above), base on RM200mil net profit the EPS will be 11.4sen.

A simple PE ratio of 10x will give it a fair value of RM1.14.

If net profit is RM260mil base on 40% share, then EPS will be 14.8sen. 

In the interview with FocusM, Jaks CEO mentioned that "we are already working on exercising this option (of further 10% share in the power plant)."

So it's clear that Jaks wants this extra 10% of power plant badly. Hopefully they can get it over the line as soon as possible.

The profit estimation above is based solely on its Vietnam power plant. 

Jaks still has some construction jobs on hands which run until 2020-2021, including the Vietnam power plant, SUKE and water infrastructure related works which used to be their strength. 

Its financial results for the past 1-2 years have been negatively affected by its property development arm which is involved in dispute with Star Media Group over the Pacific Star project.

On 29th Sep 2020, Jaks announced that it has disposed this loss and trouble-making Jaks Island Circle Sdn Bhd, a 51% owned subsidiary involved in the Pacific Star project, for RM1.

I think it should be good news, even though it still has unbilled sales to contribute to its top & bottom lines, and there will be no more liquidated ascertained damage (LAD).

As it is in net liabilities of RM151.9 million at end of Mac20, Jaks will realize an accounting gain of RM71.9mil.

The disposal was completed in the last moment of its third quarter ended 30th Sep. So this huge disposal gain should appear on its 3rd quarter result if not mistaken.

The FY20Q3 quarterly result of Jaks should be a good one, even though there is still no contribution from its power plant.

Besides the huge disposal gain, there will be revenues from its ongoing construction jobs especially from the power plant, and there will be no more joker from Pacific Star.

However, the loss-making 51%-owned Evolve Concept Mall is still there.

After exiting property development, Jaks will have more time and energy to concentrate on its infrastructure construction and power energy related business.

For the next 25 years, Jaks will be backed by a cash cow in the form of power plant. Hopefully it will manage the cash wisely and not forgetting to share it with shareholders.


  1. Thank you for sharing the article. Just one note, the PPA covers a period of 25 years from the date of COD.


    1. Hi DK, thanks for pointing out the mistake. I mixed it up with LSS.

  2. Tq for the posting.

    Which plan do u think benefit the retailers more?
    The 3rd. one or the final one?


    1. Hi mk, I prefer the final one, with less shares and warrants

  3. The above showed good systematic calculation for Jaks' fair value based on future power plant contribution vs total number of shares after the right issue.
    If Jaks' fair value can be RM1.14 to RM1.48 per share (after ex) vs 48sen per share (after ex) or 90sen per share (before ex). The upside is 137% to 208% which is very attractive.

    1. Yes, that's why I invest in Jaks. I'm not sure how market will view it afterwards since there are lots of negatives about it lately. However, I think these negatives give investors a chance to buy at lower price.

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  5. I already own some Jaks shares and am thinking to add.
    Normally, when right issue is in progress and OR shares is available for trading in open market, the price of OR share would come down towards its last trading day (probably due to some shareholders don't want to subscribe or lack of cash money to do so). If buy the OR share at that time and then pay +22sen to subscribe the right issue shares, i probably can add Jaks at lower price :P
    This is the reason i am still waiting before adding. I maybe wrong bcos what "normally" happen may not happen in stock market.

    1. I'm not sure about this. I'm also thinking to add more shares either before RI, OR shares or after RI. It's hard to predict the price movement so if the next few days its price is still weak, I might buy some.

  6. Hi BD,

    Thanks for your detail analysis on JAKS, really appreciate that.
    What's your thought on the outlook for cement stocks ?


    1. Hi SW, I do not study cement stock but in general it's expected to benefit from uptick in construction and property segment. Most investors expect construction sector to perform better next year and I hope so.