• Malakoff Corporation announced that its associate Almiyah Attilemcania SpA (AAS) has received a notice of termination by its offtakers in respect of the water purchase agreement dated 9 December 2007.

• Almiyah Attilemcania SpA (AAS) has a water desalination plant in Algeria. In FY15, AAS was imposed a penalty of US$42.7mil by the court in Algeria for an alleged breach of the foreign exchange regulations in the country. Malakoff is appealing against the penalty in the Supreme Court after the Court of Appeal and the lower court in Algeria upheld the penalty.

• The offtakers are Sonatrach SpA and L’algerieene Des Eaux, which are companies in Algeria. Sontrach SpA is an oil and gas company while L'Algérienne Des Eaux is the government’s agency in charge of water resources in Algeria.

• The water purchase agreement was terminated due to the failure of AAS to honour remediation commitments that were notified by the offtakers. We do not know the story behind this yet pending clarification from management.

• In the Bursa Malaysia announcement, Malakoff said that it has already made provisions for its investment in AAS in FY16. Hence, there is no impact on its earnings. Malakoff said that it would be seeking legal advice to challenge the purported termination notice.

• We believe that AAS is not a major earnings contributor. Malakoff’s indirect stake in AAS is only 35.7%.

• In total, share of net profits in associates and joint ventures accounted for 13.8% of Malakoff’s pre-tax profit in 1HFY18.

• Maintain HOLD on Malakoff with an unchanged DCF-based fair value of RM0.89/share.

Source: AmInvest Research - 21 Nov 2018