The Nation



Italian-Thai Development

Huge port and rail contracts in Mozambique - Signed Bt120bn contract to construct port and rail system in Mozambique - Not yet in our numbers, but this will boost backlog 80% - Cut target price to Bt5.50 from Bt6.40, still Neutral

Italian-Thai Development Plc (ITD)

Port and rail in Mozambique. ITD won a government contract to built and operate a port and rail system from Moatize to Macuse in Mozambique, signing the contract on December 13. The construction portions of the contract are: 1) a 530km rail network from Moatize to Macuse and 2) a deep sea port for dry bulk shipping, with capacity of 25mn tons per year. The project is valued at Bt120bn or US$4bn, with construction period of 4-5 years. ITD will have the right to operate the project for another 30 years.

ITD to take sole responsibility for the construction. The revenue from the construction that will pass to ITD has not been calculated in the value of the project. Generally, 10-15% of the project value is paid to ITD upfront, with the rest paid in installments as work progresses. The construction cost of the rail project is estimated at US$500mn or Bt15bn. We expect ITD to hold a 30% equity stake and sell 70% to other investors. A capital call is unlikely.

Backlog will grow by 80%. ITD currently has backlog of Bt142bn (excluding the water project which is part of the stalled Bt2trn bill). The Mozambique project will increase backlog by 80% to Bt262bn. We have not put this into our backlog forecast, as we expect ITD to formally announce its backlog soon. We see this Mozambique deal as proving that big contractors can still generate significant revenue without government contracts.

Mozambique coal. Mozambique ranks in the top ten in terms of coal reserves. Its reserves are estimated to be in the range of 150bn tons, but current infrastructure allows it to extract a maximum of just 1.5mn tons per year. Once Phase I of ITD's project is complete, this is expected to climb to 25mn tons per year, and completion of the entire project will boost this to 100mn tons per year.

Still Neutral, new target price of Bt5.50. We maintain Neutral, though the recent price drop does provide the opportunity for short-term bottom-picking. In the long term we feel that share price will not improve until the political situation does. We have cut price target to Bt5.5 from Bt6.5 after using a new valuation of 2.0x P/BV in 2014, down from 2.5x P/BV in 2013.

Risks. Political uncertainty is detrimental to sentiment towards the investment environment and hampers addition of backlog from government work.

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