Investment Highlights

• We maintain BUY on Malakoff with an unchanged fair value of RM1.00/share (WACC: 7.6%) due to its decent dividend yield of 6.1% for FY20F. Malakoff is currently trading at FY20F PE of 17.1x and FY21F PE of 16.8x.

• We are keeping our gross DPS of 5.5 sen for Malakoff in FY20F (FY19: 6.5 sen) for now. The FY20F gross DPS of 5.5 sen translates into a decent yield of 6.1%. Recall that Malakoff was able to pay a higher gross DPS of 6.5 sen in FY19 due to the RM988mil disposal of its 50% stake in MacArthur Wind Farm, Australia.

• Although Malakoff’s 1QFY20 net profit appears to exceed expectations, we are keeping our net profit forecast of RM257.1mil for now. There is a possibility that Malakoff’s share of net profit in associates and low effective tax rate may not be sustainable in the coming quarters.

• Malakoff’s effective tax rate declined to 26.3% in 1QFY20 from 35.6% in 1QFY19. Share of net profit in associates and joint ventures surged by 147.5% to RM40.8mil in 1QFY20 from RM16.5mil in 1QFY19 as Malakoff increased its effective ownership in the Shuaibah assets in the Middle East to 24% from 12%.

• Also, Malakoff does not have to recognise any share of losses at the 40%-owned Kapar Energy Ventures (KEV) power plant anymore as Malakoff has fully impaired its investment in KEV in FY19.

• Although Malakoff consolidated Alam Flora’s earnings from 1 January 2020 onwards, group revenue and EBITDA still declined by 9.8% and 6.6% YoY respectively in 1QFY20 due to weaker fuel margin, lower energy payments from Tenaga Nasional and scheduled maintenance works at the Segari Energy Ventures power plant.

• Without Alam Flora, we believe that Malakoff’s revenue and EBITDA would have been lower in 1QFY20. Alam Flora contributed net profit of RM15mil or 16.9% of Malakoff’s net profit of RM89.2mil in 1QFY20.

• Energy payments from Tenaga Nasional to the Tanjung Bin Energy (TBE) and Tanjung Bin power plants slid QoQ in 1QFY20 due to lower coal prices.

• In its results announcement, Malakoff said that the movement control order (MCO) has resulted in a reduction in electricity demand, which will affect the dispatch of electricity to Tenaga Nasional. This is expected to result in lower energy payments in the coming quarters. However, Malakoff will still receive capacity payments for its power plants.

Source: AmInvest Research - 21 May 2020