Investment Highlights

• We are keeping our BUY recommendation on Malakoff with an unchanged fair value of RM1.00/share (WACC: 7.6%). Malakoff is currently trading at an FY20F PE of 17.5x.

• Malakoff has declared a gross DPS of 2.44 sen for 2QFY19, which is higher than the 2.1 sen recorded in 2QFY18. We have forecast a gross DPS of 5.0 sen for FY19E, which translates into a yield of 5.7%.

• Malakoff’s 1HFY19 net profit was slightly below our forecast but within consensus estimates. We have reduced Malakoff’s FY19E net profit by 4.2% to account for weaker share of profits in associates and earnings from the TBE power plant.

• Comparing 2QFY19 against 1QFY19, Malakoff’s net profit fell by 22% to RM52.3mil due to lower share of profits in the associates and earnings from the TBE power plant.

• The group’s share of profits in associates declined by 41.1% QoQ in 2QFY19 as losses at the Kapar Energy Ventures power plant (KEV) widened.

• Also, energy payments from the TBE power plant tumbled 89.1% QoQ to RM37.2mil in 2QFY19 as it carried out a 73- day scheduled maintenance outage and rectification works 31 March–12 June 2019. Equivalent availability factor at TBE plunged to 55% in 2QFY19 from 98% in 1QFY19.

• On a yearly basis however, Malakoff’s net profit rose by 13.1% YoY to RM119.3mil in 1HFY19 in the absence of unplanned outages at the TBE power plant. TBE’s capacity payments climbed by 14.4% to RM303.2mil in 1HFY19 from RM265.1mil in 1HFY18. TBE’s energy income increased by 1.8% to RM377.7mil in 1HFY19 from RM370.9mil in 1HFY18.

• Share of profits in associates slid by 20.0% YoY to RM26.2mil in 1HFY19 dragged by bigger losses at KEV. Share of losses at KEV widened to RM26.8mil in 1HFY19 from RM12.1mil in 1HFY18. Most of the associates’ earnings in 1HFY19 came from Shuaibah Water & Electricity Company and Hidd Power Company in the Middle East.

• The RM944.6mil proposed acquisition of Alam Flora Bhd is envisaged to be completed by 1Q2020. On a full-year basis, we expect Alam Flora to improve Malakoff’s net profit by 10%.

• Malakoff’s proposed acquisition of a 20% stake in the Shuaibah assets for US$70mil (RM289.8mil) from Khazanah Nasional is expected to be completed in 4QFY19. This would improve Malakoff’s net profit by 7% to 9%. We have not accounted for the impact of both acquisitions in Malakoff’s FY20F net profit yet.

Source: AmInvest Research - 26 Aug 2019