• Malakoff Corporation has proposed to dispose of its 50% stake in MacArthur Wind Farm in Australia to AMP Capital Core Infrastructure Fund for A$356.9mil (RM1,024.4mil). The proposed disposal is expected to be completed by 1QFY20.

• We are neutral on the proposed disposal. Malakoff would be recording a one-off gain on disposal of RM546mil based on the cost of investment of A$130.3mil recorded in FY13.

• Operationally however, due to the loss of earnings from MacArthur Wind Farm but including the incremental earnings from the acquisition of an additional 12% effective stake in the Shuaibah assets, Malakoff could be facing a net earnings shortfall of RM16.6mil.

• This is 6.6% of our FY20F net profit forecast of RM251.2mil for Malakoff and 6.2% of consensus estimate of RM269.7mil.

• MacArthur Wind Farm contributed a revenue of RM163.4mil and net profit of RM56.6mil to Malakoff in FY18. The net profit of RM56.6mil was 20.6% of Malakoff’s reported net profit of RM274.4mil (including gain on disposal of RM55mil) in FY18.

• The earnings shortfall may be fully covered if Malakoff completes the RM944.6mil acquisition of a 97.4% stake in Alam Flora Bhd in 1QFY20. Alam Flora is estimated to lift Malakoff’s net profit by almost 10% on a full-year basis.

• The selling price of A$356.9mil translates into an FY18 PE of 15.7x based on Malakoff’s Australia unit’s share of net profit of A$22.8mil in MacArthur Wind Farm. Based on a 100% shareholding, we believe that MacArthur Wind Farm recorded a net profit of A$45.6mil in FY18.

• The selling price was arrived at based on the discounted cash flows of the remaining life of MacArthur Wind Farm’s offtake contract of 18 years. All of the electricity produced by MacArthur Wind Farm is contracted to AGL Hydro Partnership until year 2038.

• Out of the proceeds of A$356.9mil, Malakoff would be using A$140.0mil (RM401.9mil) to repay the acquisition loan of MacArthur Wind Farm while another A$210.5mil (RM604.2mil) will be deposited in the Disposal Proceeds Account in accordance with the provision under the Trust Deed of the RM5.4bil sukuk borrowings. The balance A$6.4mil (RM18.4mil) will be used to pay transaction costs.

• We maintain our BUY recommendation on Malakoff with a fair value of RM1.00/share.

Source: AmInvest Research - 30 Oct 2019