Investment Highlights

• Maintain HOLD on Malakoff Corporation with an unchanged DCF-based fair value of RM0.89/share (WACC: 7.6%). Our fair value of RM0.89/share implies an FY19F PE of 16.7x. Malakoff is currently trading at a FY19F PE of 15.5x vs. Tenaga Nasional’s 10.8x and YTL Power’s 23.4x.

• We have reduced Malakoff’s FY18F net profit by 7.0% to account for a higher effective tax rate of 45% vs. 31% previously. Malakoff’s effective rate is expected to increase in FY18F (FY17: 36%) due to the payment of dividends to a subsidiary, which are not tax deductible.

• In spite of the downward revision in earnings, we expect Malakoff’s earnings to be better in 2HFY18 compared with 1HFY18. The earnings enhancement is anticipated to be underpinned by margins improvement and fewer unplanned outages at the Tanjung Bin Energy Power Plant.

• In respect of Alam Flora, its fee structure is being reviewed by the government currently. We believe that the fees charged to SW Corp (Solid Waste and Public Cleansing Management Corporation) for waste collection would be maintained. If the government decides to reduce the fees, DRB-Hicom would compensate Malakoff with RM140mil cash over two years. Recall that Malakoff has proposed to acquire 97.4% of Alam Flora from DRB-Hicom Bhd for RM944.6mil cash.

• Based on the existing fee structure, we estimate that Alam Flora would boost Malakoff’s FY19F net profit by about 10%. The corporate contribution, which resulted in Alam Flora’s net loss of RM4.4mil in 1QFYE3/19, would not be repeated. We have not factored Alam Flora’s earnings contribution into Malakoff’s P&L yet.

• We believe that Alam Flora would more than compensate for the loss in earnings and value of the Port Dickson (PD) power plant (PD Power). The PPA (power purchase agreement) for Malakoff’s PD power plant will expire in February 2019. There are three scenarios.

• First, the Energy Commission may extend PD Power’s PPA but at reduced capacity payments. Second, the power plant may be rebuilt at a higher capacity. If this happens, Malakoff would be taking part in the tender process. Third, the power plant may be taken apart and then exported and reassembled in other countries.

• The loss of PD Power would reduce Malakoff’s fair value by 4 sen from RM0.89/share to RM0.85/share. However in terms of earnings, the impact is not expected to be significant as PD Power only accounts for about 2.2% of Malakoff’s capacity payments and 6.9% of total effective generating capacity. PD Power has a generating capacity of 436MW and net book value of RM61.8mil.

Source: AmInvest Research - 16 Oct 2018