JAKS RESOURCES HOLD. A better start to the year. Company Report. (Unchanged) 4 March 2010 WATER. Mak Hoy Ken

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1 JAKS RESOURCES (JAKS MK, JAK.KL) WATER Company Report Mak Hoy Ken A better start to the year Rationale for report : Company visit HOLD (Unchanged) Price Fair Value 2-week High/Low Key Changes Fair value EPS RM.82 RM.98 RM.31 - RM1.8 YE to Oct FY9 FY1F FY11F FY12F Revenue (RMmil) Core Net Profit (RMmil) (6.7) Core EPS (sen) (1.) EPS growth (%) n/m n/m Consensus EPS (sen) n/a n/a n/a DPS (sen).... Core PE (x) n/m EV/EBITDA (x) Div yield (%).... ROE (%) (1.2) Net Gearing (%) Stock and Financial Data Shares Outstanding (million) Market Cap (RMilm) 277. Book value (RM/share) 1.4 P/BV (x).6 ROE (%) (1.2) Net Gearing (%) 18. Major Shareholder KPS 12.% Ang Lam Poah 6.1% Original Invention.7% Ang Ken Seng.1% Free Float (%) 7.6 Avg Daily Volume (RMmil) 4.3 Price performance 3mth 6mth 12mth Absolute +1.% +1.9% +97.6% Relative +14.3% -7.% +33.% PP12247/4/21(2399) Investment Highlights We maintain our HOLD call on JAKS Resources Bhd (JAKS) with a slightly lower fair value of RM.98/share (previously: RM1./share) - based on an unchanged P/B target of.9x - as we move our valuation base to FY1F. This pegs the stock at mid-point of its historical P/B band of.4x-1.2x. JAKS revealed yesterday that it has via 1%-unit - JAKS Island Circle Sdn Bhd - entered into an agreement with Star Publications (M) Bhd to jointly develop a mixed development project in Section 13, Petaling Jaya. Project has an estimated Gross Development Value (GDV) of RM37mil. JAKS management is confident that the project will be favourably received - given its prime location within the matured Section 13 enclave near the Jaya 1 commercial area. Furthermore, JAKS will likely be roped in to undertake construction works for the development. This follows a dam project in Terengganu worth over RM3mil that JAKS secured recently. Construction works are expected to take 42 months to complete. Taken together, these two new jobs are expected to bump up its order book to RM721mil (4.7x FY9 construction revenue). Meanwhile, JAKS has submitted a joint bid with a reputable local contractor for the piping package of the Pahang- Selangor raw water transfer project (IRWT) worth an estimated RM3mil-RM4mil. Award of the tenders should be known within the next one to two quarters. While any bidding war will likely be intense, we reckon that JAKS has a competitive edge on three counts: (1) JAKS is a specialist for large-diameter supply and lay contracts - backed by a strong partner; (2) JAKS has the capacity to undertake a project of such size (average mill utilisation rate: 4%); (3) It enjoys superior logistical advantage due to the strategic location of its plant in Bentong. Abroad, JAKS is in advanced negotiations to rope-in a Chinese entity as a cornerstone investor for its ambitious US$2bil power plant project in Vietnam. Group aims to raise required funding for the power plant by end-1q1 - pending finalisation of the power purchase agreement. At FY11F-12F PEs of 14x-21x, JAKS valuations might seem rich against a patchy earnings track record. But our HOLD rating is largely premised upon its strategic positioning along Malaysia s water supply chain - where news flow on large water infrastructure contracts appear to be gaining traction in recent months. Success in clinching piping works for the Pahang portion of the IRWT alone will significantly lift JAKS FY11F-12F EPS by 36%-39%. This would improve its PEs to a more attractive 9x-14x during this period.

2 MAINTAIN HOLD ON JAKS Fair value revised downwards to RM.98/share We maintain our HOLD rating on JAKS Resources Bhd (JAKS) with a slightly lower fair value of RM.98/share from RM1./share - based on an unchanged P/B target of.9x. This pegs the stock at a mid-point of its historical P/B band of.4x-1.2x, as we roll-forward our valuation base to FY1F. We have valued JAKS using a P/B methodology, as the group s earnings has been somewhat volatile over the last few years - recording net losses in FY6 (RM6mil) and FY9 (RM7mil). Despite our earnings downgrade, we project JAKS to swing to net profit of RM11mil for FY1F against loss of RM7mil a year ago. Improvement is largely premised on maiden contributions from two recently secure projects over the last three months: (1) A dam project in Trengganu; and (2) A mixed residential and commercial development in PJ. Negating this would be a continued drag from its manufacturing division - where we have projected an operating loss of RMmil for FY1F against a RM9mil deficit a year ago. A BETTER START TO THE YEAR JV with Star to develop land in Section 13 PJ JAKS announced on Bursa Malaysia yesterday that its 1%-owned subsidiary - JAKS Island Circle Sdn Bhd (JAKS Island Circle) - has entered into an agreement with Star Publications (Malaysia) Bhd (Star) to develop a mixed residential and commercial development in Section 13, Petaling Jaya. Land earmarked for the project measures about 6 acres - with a lease tenure that expires on 7 January 262. It is currently being let to Utar Education Foundation. JAKS Island Circle will develop the project - which has an estimated Gross Development Value (GDV) of RM37mil. Meanwhile, Star will contribute the land in return for a 3% share of the GDV or RM111mil - whichever is higher. Entire project will take up to five years to complete. It will likely commence in 2H 21 - once all relevant approvals are received in three months time. Apart from proceeds from sale of units, JAKS management revealed that it could raise up to RMmil in bridging facilities or rely on internally generated funds to bridge any funding gaps. Development comprises of four tower blocks. Tower A and C comes with two 2-storey office blocks each - with Star entitled to proceeds from the sale of units from the latter. Tower D consists of a 1-storey residential block. JAKS Island Circle will retain the remaining Tower B block - to be leased to Universiti Tunku Abdul Rahman (UTAR) for 2 years. We gather that monthly rental and service charges for the first three years has been set at RM2./sq ft and RM.2/sq ft respectively. Project represents JAKS first foray into large scale property development. Group s management appears confident that the project will achieve a good response - given its strategic location within the matured Section 13 enclave near the Jaya 1 commercial area. Furthermore, we gather JAKS would likely be roped in to undertake construction works for the project. Based on the development portion alone, we estimate this new project to contribute 12%-14% of FY11F-12F earnings. Secures irrigation dam project in Trengganu The EdgeWeekly reported last weekend that JAKS had recently been awarded a dam project in Besut, Trengganu - its first major win in more than a year. JAKS is believed to be leading a consortium to undertake the Paya Peda Dam worth over RM3mil - largest ever secured by the group. The report added that the JAKS-led consortium has the job virtually in the bag - pending the finalisation of certain terms with its partners. Construction is expected to take up to 42 months to complete. We have assumed a pretax margin of 9% We understand that value of the project was RM2mil when it was first mooted in 28 - and is part of a RM6bil set aside for the agricultural sector under Budget 21. Project forms part of an integrated plan by the Agricultural Ministry back in 1987 to develop a feasible flood mitigation as well as irrigation program for the Besut river basin. This is primarily for benefit of the Besut irrigation scheme area and lower Semarak River basin areas, which adjoins Kelantan. Entire works program includes construction of an irrigation dam. Initially, temporary river diversion works will be carried out along with construction of a coffer dam and water transfer tunnel. Subsequently, a large dam will be constructed together with water intake facilities. Impounded area measures about 3, acres. So far, JAKS has already undertaken preliminary site clearance works - including falling of trees. Actual physical works are expected to commence after a survey is conducted on the project site - including relocation of squatters. We have spoken to and confirm that JAKS has the technical as well as execution capabilities to deliver on a project of such magnitude. 2

3 TABLE 1 : OUTSTANDING ORDERBOOK Project Outstanding (%) of Value (RM mil) orderbook Sabah Water project (Phase 2) School projects 39.. Dam project, Terengganu Section 13 project Current Orderbook Group had previously delivered a similar job in Sabah worth RM197mil - on a smaller scale. Project was for construction of a water treatment plant, storage tank as well as main pipes in Telibong and Telipok - located within Kota Kinabalu. Together with the building works for the Section 13 project, latest contract win will bump up group s outstanding order book to circa RM721mil or (4.7x its FY9 construction revenue) by year-end (See Table 1). Next leg-up: IRWT We believe renewed optimism on the highly-anticipated Pahang-Selangor interstate raw water transfer project (IRWT) should pique fresh interest on JAKS. Just last week, it was reported that international tenders for the Kelau Dam would be called soon (See Table 2). As for JAKS - group has submitted a bid together with another reputable local player for the piping package of the IRWT. JAKS is expected to have a 4% stake in the JV. We understand that tender bids are supposed to have closed on January 12 - with awards to be made within the next one to two quarters. Although the bidding war would likely be intense, we reckon that JAKS has the competitive edge on three counts. First, JAKS has the pedigree as a specialist for supply and lay contracts for large diameter pipes - backed by a strong partner. Second, JAKS has the capacity to undertake a project of such size. Group has under its wings - two plants specialising in the production of large diameter pipes. Its 36, tonne p.a. plant in Bentong can produce pipes of up to 1,8 mm in diameter range. The other plant is located in Klang - with a capacity of 24, tonne p.a. (diameter range: 3,mm). Third, JAKS enjoys superior logistic advantage due to the strategic location of its Bentong plant - which is situated at the start of the water transfer tunnel in Pahang. Any success in clinching the piping package for the Pahang side would put JAKS in a strong position to bid for similar works for Langat 2 - the Selangor portion of the IRWT. MANUFACTURING DIVISION: STILL A DRAG For FY9, JAKS manufacturing division recorded a loss of RM6mil against total revenue of RM113mil. While there were no significant write-downs, group made the conscious decision to de-stock its inventories amid a competitive operating environment. To be sure, value of its inventories has fallen by a steep 67% to RM28mil as at 31 October 29 compared to RM87mil a year ago. Average utilisation rates for its plants stood at 4% - as its steel products suffered from depressed selling prices and compressed margins. This is particularly true for its large diameter pipe plants in Bentong and Klang - which continues to be underutilised due to a lack of supply and lay jobs. Large chunk of demand currently comes from the Sabah undersea pipeline project - which is expected to be completed this financial year. For FY1F, we continue to project its manufacturing division to be in the red - albeit at a smaller quantum of RMmil compared with FY9 s RM9mil. We have also assumed average utilisation rates of 2%-47% for its large-diameter pipe plants. MAKING PROGRESS ON VIETNAM POWER PLANT PROJECT Potential entry of Chinese investor to minimise execution risk JAKS revealed that the group is in advanced discussions to rope-in a large state-backed entity in China as a cornerstone investor for its ambitious US$2bil power plant project in Vietnam. The Chinese party may eventually take up a 3% stake in the project although JAKS will still be the controlling shareholder. If the deal is consummated, we gather that the Chinese party will likely take a pro-active stance in the project. This may include having a lead role in the Engineering, Procurement, Construction and Commissioning (EPCC) works for the power plant. 3

4 TABLE 2 : PAHANG SELANGOR INTERSTATE RAW WATER TRANSFER PROJECT Portion Potential Details Timeline Est.Cost Notes contractors (RM bil) PAHANG Tunneling Shimizu-UEM-IJM- 44km-long, m diameter Bid documents opened in Nishimatsu JV Capacity (2,2 mld) April 28. Three parties short-listed: Shimizu-UEM-IJM- Nishimatsu JV Taisei-HRA Teguh JV 4 May 29: Contract awarded to Shimuzu-led consortium. Construction works started in June - and completed by end-214. Kelau Dam Japanese-led 3m height Includes the Kelau Dam, consortiums Muka Sauk Complex and Subcontractor: Semantan pump station. Loh & Loh (M&E) Tender bids to open in January. Construction works to be completed by end-214. Pipline works JAKS Dual pipeline Tender bids closed on 12 12km-long, 3m wide January 21. JAKS has submitted a joint-bid with another local contractor on a 4:6 basis. Contract likely to be awarded by end-1h 21 - with construction works by end-214. SELANGOR Construction of WTP: Gamuda WTP (2,26mld) Tender bids expected to open water treatment plant Loh & Loh Distribution pipeline (phase 1) by 2H 21. and related facilities Pipeline: JAKS (1,mm-2,mm) (phase 2) KDE granted first right of refusal for capex/ O&M works by Federal government on February 28 Phase 1: RM2.bil Phase 2: RM2.bil Total land area for project estimated at 8 ha. Phase 1 to be completed by end-214 together within completion of Pahang portion of the IRWT. Source: Various, AmResearch 4

5 Such a move would likely reduce execution risk for JAKS - as the massive project represents its maiden foray into power plant concessions. Meanwhile, JAKS hopes to finalise the power purchase agreement (PPA) by the end of this month. This will include the power tariffs over the 2-year concession period. Further out, JAKS mentioned during discussions that the devaluation of the Vietnamese Dong was a non-issue, as the project s revenue and a large portion of its cost are quoted in US dollars. Boost from coal supply agreement We take comfort that JAKS has successfully sealed a landmark coal supply agreement with state-owned Vietnam Coal and Mineral Industries Group (Vinacomin). This is crucial to the project s viability, as it will enable JAKS to secure its coal supplies at only one-third the cost of international coal. JAKS management has targeted a project internal rate of return (IRR) of 1%. In terms of financing, JAKS does not expect much difficulties in raising the capital required by end-1q 21 once it firms up the PPA. However, JAKS s management acknowledged that it is still negotiating for favourable tariffs that would offset the high cost of financing in Vietnam - which is in excess of 1%. If all goes well, group hopes to kick-off the project by the second half of this year. RAISING FRESH CAPITAL JAKS aims to receive all the necessary approvals for its proposed private placement exercise by end-1q1. To recap, group is planning a private placement of up to 1% of its paid-up capital together with detachable warrants. Based on an indicative issue price of RM1./share, JAKS will raise up to RM48mil from the proposed private placement. We gather that the detachable warrants are thrown in as a sweetener to make the deal more attractive. Including the establishment of a new Employee Share Option Scheme (ESOS), the entire capital raising exercise may see JAKS share capital expand by up to 32% to 79 million shares. However, JAKS guided that the final amount of fresh capital to be raised - if any - hinges on several developments. Among others, this would include the status of its Vietnam power plant project as well as other future contract bids. Moreover, the group has up to one year to implement the private placement once it gets the green light to do so. This, in turn, could be executed on a staggered basis involving multiple tranches.

6 CHART 1 : GROUP OPERATING TRENDS () (2) 1Q7 2Q7 3Q7 4Q7 1Q8 2Q8 3Q8 4Q8 1Q9 2Q9 3Q9 4Q9 (1) Revenue EBIT EBIT margin (%) CHART 2 : CONSTRUCTION DIVISION OPERATING TRENDS Q9 3Q9 2Q9 1Q9 4Q8 3Q8 2Q8 1Q8 4Q7 3Q7 2Q7 1Q7 Revenue EBIT EBIT margin (%) 6

7 CHART 3 : MANUFACTURING DIVISION OPERATING TRENDS () (1) 4Q9 3Q9 2Q9 1Q9 4Q8 3Q8 2Q8 1Q8 4Q7 3Q7 2Q7 1Q7 (1) (1) Revenue EBIT EBIT margin (%) 7

8 TABLE 3 : FINANCIAL DATA Income Statement (RMmil, YE Oct) F 211F 212F Revenue EBITDA Depreciation/Amortisation (3.1) (3.2) (3.4) (3.7) (3.9) Operating Income (EBIT) Net interest (6.1) (.7) (7.4) (9.4) (1.6) Exceptionial items..... Associates... Pretax profit 7.2 (2.4) Taxation (4.1) (4.) (2.4) (.1) (9.1) Minorities (.2) (.4).4 (2.1) (3.7) Net profit 2.9 (6.7) Core net profit 2.9 (6.7) Balance Sheet (RMmil, YE Oct) F 211F 212F Fixed Assets Intangible assets Other long term assets Total non-current assets Cash & equivalent (4.7) Stock Trade debtors Other current assets Current assets Trade creditors Taxation Short term loans Others..... Current liabilities Long term loans Other long term liabilities Long term liabilities Shareholders funds Minority interests BV / share (RM) Cash Flow (RMmil, YE Oct) F 211F 212F Pretax Profit 7.2 (2.4) Depreciation/Amortisation Net change in working capital (36.4) 7.6 (33.) (47.) (29.) Others (4.1) (4.4) (2.4) (.1) (9.1) Cash flow from operations (66.3) 36. (19.6) (24.6) 4. Capital expenditure (3.9) (2.8) (1.) (1.) (1.) Net investments & sale of fixed assets Others Cash flow from investing 1.7 (1.) (1.) (1.) (1.) Debt raised / (repaid) 13. (26.) Dividends paid..... Equity raised / (repaid) Others (1.2) (.4)... Cash flow from financing 6. (26.4) Net cash flow Net cash / (debt) b/f (9.1) (4.7) Net cash / (debt) c/f (4.7) Key Ratios (YE Oct) F 211F 212F Revenue growth (%) (17.3) EBITDA growth (%).4 (61.) n/m Pretax margins (%) 3.1 (.9) Net profit margins (%) 1.2 (2.4) Interest cover (x) Effective tax rate (%) 7.7 n/m Net dividend payout (%)..... Debtors turnover (days) Stock turnover (days) Creditors turnover (days)

9 Published by (331-P) (A member of the AmInvestment Bank Group) 1th Floor Bangunan AmBank Group Jalan Raja Chulan 2 Kuala Lumpur Tel: (3) (general) (3) /99 (dealing) (3) (research) Fax: (3) The information and opinions in this report were prepared by. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. For Benny Chew Managing Director 9