Investment Highlights

• We are keeping our BUY recommendation on Malakoff with an unchanged DCF-based fair value of RM1.00/share (WACC: 7.6%). Our fair value of RM1.00/share implies an FY20F PE of 19.1x. Malakoff is currently trading at FY20F PE of 15.7x and FY21F PE of 15.1x.

• We have raised Malakoff’s FY20F net profit by 4.3%. This is to account for: (1) Alam Flora’s contribution; and (2) higher interest income from the disposal proceeds of MacArthur Wind Farm. These two would more than compensate for the loss of earnings from the disposal of MacArthur Wind Farm in December 2019.

• Alam Flora is estimated to account for 10% of Malakoff’s revenue and 9% of EBIT in FY20F. Also currently, coal power plants make up 48.9% of Malakoff’s effective generation capacity while gas (including the multi-fuel units at the Kapar power plant) comprises another 51.1%.

• There is room for higher dividends in FY20F although we do not expect Malakoff to return all of the RM988mil proceeds from the disposal of MacArthur Wind Farm to shareholders.

• Assuming 10% of the RM988mil disposal proceeds or RM98.8mil are used to pay dividends, this would translate into an additional 1.9 sen per share. We think that the rest of the disposal proceeds would be used to repay borrowings, which would result in lower interest expense in the future. Malakoff’s gross borrowings stood at RM13.9bil as at end-September 2019 (including perpetual sukuk of RM800mil).

• We have not factored in higher dividend payments from Malakoff yet. Currently, we forecast a gross DPS of 5 sen for FY20F, which translates into a yield of 6.1%.

• We expect the TBE (Tanjung Bin Energy) power plant’s capacity and energy payments to sustain in FY20F. TBE has stabilised after being shut down for 73 days in 2QFY19 for maintenance and rectification works.

• We understand that the unplanned outage rate (UOR) at TBE has fallen below 3% compared with the peak of 13%. The threshold UOR level stipulated in the PPA with Tenaga Nasional is 6%. TBE accounted for 29.2% of Malakoff’s capacity payments in 9MFY19.

• We believe that Malakoff would continue to scout for opportunities in the renewable energy sector. So far, the group’s exposure in the renewable energy space is via its 55MW hydro power plants in Pahang, which were awarded in December 2019 and an O&M contract for the 29MW solar power plant in Kota Tinggi, Johor

Source: AmInvest Research - 3 Feb 2020