Investment Highlights

• Maintain HOLD on Malakoff with a lower DCF-based fair value of RM0.85/share (WACC: 7.6%) vs. RM0.89/share previously. Our fair value of RM0.85/share implies an FY19F PE of 21.4x.

• Malakoff’s 9MFY18 core net profit was below our expectations and consensus estimates.

• Malakoff’s 3QFY18 performance was weak. Excluding the RM55.3mil gain on the disposal of 20% of Lekir Bulk Terminal to Integrax Bhd, Malakoff’s net profit would have fallen by 46.3% QoQ in 3QFY18.

• Malakoff was affected by unplanned power outages in three power plants in 3QFY19. These are the Tanjung Bin Energy (TBE) power plant, GB3 power plant and KEV power plant.

• TBE experienced an unexpected boiler wall tube leak and at the same time, there were automatic voltage regulator rectification works. The rectification works started on 9 September and were only completed on 24 October 2018.

• We have cut Malakoff’s FY18E net profit by 15.0% to reflect all of these. We have also reduced Malakoff’s FY19F net profit by 25.7% to account for an effective tax rate of 45% vs. 40% previously and lower share of profits in associates.

• Going forward, there will be a scheduled outage in TBE in 1QFY19 to address the power plant’s operational issues. As this is a planned outage, TBE would still be able to enjoy capacity payments from Tenaga Nasional.

• Malakoff’s core net profit declined by 49.8% YoY to RM133.7mil in 9MFY18 due to power outages at TBE, lower capacity payments from Segari Energy Ventures (SEV) and weaker fuel margin at the Tanjung Bin and TBE power plants.

• Capacity payments from the SEV power plant fell by an estimated 75.2% after a new PPA was signed to extend the concession by 10 years from 2017 to 2027.

• Fuel margin was weaker at the TBP and TBE power plants due to coal, which was purchased at a higher price. This, coupled with the power outages at TBE and SEV’s lower capacity payments, contributed to a drop in Malakoff’s EBITDA margin from 33.2% in 9MFY17 to 27.1% in 9MFY18.

Source: AmInvest Research - 26 Nov 2018