Investment Highlights

• We are downgrading Malakoff to HOLD from BUY with a lower DCF-based fair value of RM1.00/share (WACC: 7.5%) vs. RM1.10/share previously. We have reduced Malakoff’s FY20E net profit by 8.2% and FY21F net earnings by 6.1%. We believe that an unplanned outage at the Tanjung Bin Energy (TBE) power plant in 4QFY20 would affect Malakoff’s net profit.

• TBE accounted for 29.0% of Malakoff’s capacity payments in 9MFY20 while the TBP power plant accounted for a larger 47.6%.

• In spite of the downward revision in Malakoff’s earnings forecast, we are keeping our gross DPS forecast of 6.5 sen (FY19: 6.5 sen) each for FY20E and FY21F. The gross DPS of 6.5 sen translates into a decent dividend yield of 7.2% based on the share price of RM0.90.

• We forecast Alam Flora to account for 19.4% of Malakoff’s net profit in FY21F. Apart from waste collection, Alam Flora’s growth is expected to be underpinned by the environmental solutions segment, which involves sanitisation and cleaning works. The environmental solutions division accounts for about 20% of Alam Flora’s earnings.

• Due to Covid-19, Alam Flora is expected to benefit from sustained demand for sanitisation works in FY21F. Also recently, Alam Flora assisted the Pahang state government in cleaning works after the state was hit by floods.

• On the flip side, Malakoff’s despatch of electricity to Tenaga Nasional (TNB) may be affected if the MCO (movement restriction order) lasts for more than two weeks. In 2QFY20, Malakoff’s energy payments fell by 25.1% QoQ due to the MCO. However, the group’s bottomline was not severely affected in 2QFY20 due to higher earnings from the associates.

• Malakoff is expected to submit its bid for a waste-toenergy (WTE) power plant in Johor soon. The tender is envisaged to close at the end of January 2021. The winner may be announced in 2HFY21. There may be tenders for six more waste-to-energy power plants in various states such as Melaka in the coming four years.

• Based on Cypark Resources’ RM300mil Ladang Tanah Merah WTE incinerator project in Negeri Sembilan, we estimate the cost of a WTE plant at RM13.6mil per MW.

Source: AmInvest Research - 15 Jan 2021