Investment Highlights

• We are upgrading our recommendation to BUY from HOLD with a higher DCF-based fair value of RM1.00/share (WACC: 7.6%) vs. RM0.90/share previously. Our upward revision accounts for higher revenue from the Tanjung Bin Energy (TBE) power plant and Malakoff’s investment in associates. Malakoff is currently trading at FY19E PE of 17.2x and FY20F PE of 16.9x.

• We have raised Malakoff’s FY19E net profit by 6.0% to account for higher revenue from TBE. We have not accounted for earnings contribution from Alam Flora and Malakoff’s increased stake in Shuaibah Water and & Electricity Co yet. The two corporate exercises are expected to be completed by year-end. We estimate that both acquisitions would increase Malakoff’s fair value by another 10 sen in total.

• TBE is expected to be a more stable power plant after 70 days of scheduled outage and maintenance works from 31 March to 9 June 2019. By end-FY19E, TBE’s unplanned outage rate is anticipated to fall below the 6% threshold level stipulated in the PPA with Tenaga Nasional. TBE’s unplanned outage rate was 13% in FY18. Recall that TBE faced several unplanned outages in FY18 due to various operational issues.

• Although TBE went through a long scheduled outage of 70 days this year, we believe that Malakoff’s operating profit margin may not be affected significantly. We reckon that capacity payments would still be intact while operating and maintenance costs may be just slightly higher.

• Currently, Malakoff is waiting for approvals from the authorities for the proposed RM944.6mil acquisition of Alam Flora Bhd. Even without a tariff hike, we estimate that Alam Flora would improve Malakoff’s net profit by almost 10% on a full-year basis.

• The disposal of Malakoff’s 50% stake in Macarthur Wind Farm, Australia is targeted for completion by year-end. Asking price for the 50% stake in Macarthur Wind Farm was reported to be more than A$500mil. Malakoff acquired the 50% stake in Macarthur Wind Farm for A$130mil in 2013. According to Malakoff’s 2018 Annual Report, the group has borrowings of about A$615.5mil or RM1,827.1mil.

• We do not expect Malakoff to record any provision or impairment in respect of its arbitration tribunal case in Algeria yet. We think that the arbitration process would take a few years. Recall that the Algerian Energy Company has sought damages and reimbursement of RM506.1mil from Tlemcem Desalination Investment Company (TDIC). TDIC is 70% owned by Malakoff and 30% owned by Hyflux Ltd.

Source: AmInvest Research - 18 Jul 2019