Investment Highlights

• We maintain BUY on Malakoff with a higher DCF-based (WACC: 7.5%) fair value of RM1.06/share (vs. RM1.00/share previously). We have reduced the risk-free rate in Malakoff’s discount rate to 3.0% from 4.0%.  We like Malakoff for its high FY20E dividend yield of 6.0% and recurring cash flows. Malakoff is currently trading at FY20E PE of 17.5x and FY21F PE of 16.3x.

• We think that Malakoff’s 2QFY20 would be softer than 1QFY20 due to lower share of profits in associates and weaker fuel margin in Malaysia. Also, Malakoff’s revenue may decline QoQ in 2QFY20 due to a fall in energy payments and electricity despatch from Tenaga Nasional (TNB).

• Slower economic activities in March and April 2020 in Malaysia are expected to affect electricity demand. According to TNB’s 1QFY20 presentation slides, sales volume of electricity dropped by 12.6% in April 2020 from April 2019 and 24.5% in May 2020 from May 2019.

• We expect Malakoff’s quarterly results to improve after 2QFY20. This is expected to be underpinned by the recovery in economic activities. Share of profits in the Shuaibah assets in Saudi Arabia would also rise in the coming quarters as lockdown measures ease.

• In spite of the potentially weak 2QFY20, we forecast Malakoff’s core net profit (ex-FY19’s net exceptional items of RM153.0mil) to grow by 53.9% to RM257.0mil in FY20E. This is mainly due to a full-year contribution from the 97.4%- owned Alam Flora and incremental earnings from a higher stake in the Shuaibah associates. Alam Flora is estimated to account for RM68mil or 7.8% of Malakoff’s FY20E EBIT.

• There are no revisions to Alam Flora’s tariff currently. Alam Flora’s tariff review will take place in September 2021. Alam Flora was not affected by the movement control order (MCO) in 2QFY20 as it is part of the country’s essential services.

• We believe that going forward, Malakoff would be focusing on renewable energy projects. The group will be submitting a bid in the upcoming LSS4 (large scale solar) tender, which offers up to 1,000MW worth of solar power plant projects in Malaysia. Malakoff also plans to bid in overseas renewable energy projects.

• Currently, Malakoff has direct exposure to two renewable assets. The group is constructing two hydro plants with a capacity of 55MW in total in Pahang and a 2.4MW biogas power plant in Johor. Malakoff is also involved in the operations and maintenance (O&M) of a 29MW solar power plant in Kota Tinggi, Johor

Source: AmInvest Research - 2 Jul 2020