• Malakoff Corporation has proposed to acquire Khazanah Nasional’s effective interest of 20% in Saudi-Malaysia Water & Electricity Co (SAMAWEC) for US$70mil or RM289.8mil.

• After the proposed acquisition, Malakoff’s effective interest in SAMAWEC will increase to 40% from 20%.

• SAMAWEC has a 60% shareholding each in Shuaibah Water & Electricity and Shuaibah Expansion Holding Ltd.

• The proposed acquisition is expected to be completed in 4QFY19.

• We estimate that the increase in Malakoff’s effective interest in SAMAWEC will improve Malakoff’s FY20F net profit between 7% and 9%.

• In FY18, Malakoff’s share of net profit in Shuaibah Water & Electricity and Shuaibah Expansion Project Company was RM47.5mil. This was 17.3% of Malakoff’s reported net profit of RM274mil in FY18 (inclusive of gain on disposal of RM55mil).

• We also estimate that the proposed acquisition will raise Malakoff’s fair value by 5 sen/share.

• We have not accounted for the proposed acquisition in our FY20F earnings forecast for Malakoff yet.

• Malakoff is not expected to face issues financing the proposed acquisition. The group’s gross cash reserves stood at RM1.16bil as at end-March 2019.

• Overall, we view the proposed acquisition positively as it is earnings-enhancing. The proposed acquisition would increase Malakoff’s effective seawater desalination capacity to 544,375 cubic metres/day from 420,925 cubic metres/day.

• Maintain HOLD on Malakoff with an unchanged fair value of RM0.90/share for now.

Source: AmInvest Research - 12 Jul 2019