Investment Highlights

• Maintain HOLD on Malakoff with a higher DCF-based fair value of RM0.90/share (WACC: 7.6%). We have increased Malakoff’s FY19F net profit by 19% to account for higher earnings from the associates and lower interest expense. Our fair value of RM0.90/share implies an FY19F PE of 18.4x.

• Malakoff has declared a final gross DPS of 3.5 sen in 4QFY18, which brings total gross DPS to 5.6 sen. This translates into a decent dividend yield of 6.7% for FY18. We have forecast a gross DPS of 5 sen for FY19F, which implies a yield of 6.0%.

• Malakoff’s FY18 core net profit of RM219.1mil was above our expectations but within consensus estimates. Included in Malakoff’s reported net profit in FY18 was a RM55.3mil gain on the disposal of Lekir Bulk Terminal to Integrax Bhd.

• Malakoff’s 4QFY18 net profit exceeded our forecast due to higher-than-expected share of profits in associates and lower-than-estimated interest expense. Malakoff’s share of net profit in associates surged by 153.8% to RM36.5mil in 4QFY18 from RM14.4mil in 3QFY18 while net interest expense fell to RM170.8mil in 4QFY18 from RM183.7mil in 3QFY18 due to repayment of borrowings. Shuaibah Water & Electricity Company and Hidd Power Company in the Middle East accounted for most of the earnings in associates in FY18.

• After a weak 3QFY18, Malakoff’s core net profit rebounded by 203.2% to RM85.5mil in 4QFY18. There was not any unplanned power outage in 4QFY18 compared with three in 3QFY18. Recall that Malakoff was hit by unplanned power outages in three power plants in 3QFY18. The power plants were Tanjung Bin Energy (TBE), GB3 and Kapar Energy Ventures.

• Malakoff will be carrying out scheduled outages at TBE in 1QFY19 and 2QFY19 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.

• In total, the scheduled outage at TBE will last for 70 days. Replacement works will be completed by June 2019. Malakoff will bear the normal servicing expenses but General Electric will bear the cost of replacing the boiler tubes, which have been causing problems.

Source: AmInvest Research - 25 Feb 2019