Malakoff announced that its wholly-owned subsidiary, Tuah Utama SB has entered into a conditional share sale and purchase agreement (SSA) with Metacorp for the acquisition of a 49% equity interest in E-Idaman SB for a cash consideration of RM133.2m. We are positive on the acquisition as the expansion of waste management and environmental services into Kedah and Perlis will strengthen the Group’s environmental solution portfolio. Our computation shows the expected equity internal rate of return (EIRR) for the remaining concession period until 2033 is c.11-12%. To account for this new contribution into share of profit from associates, we raise our earnings estimates for FY24F-25F slightly higher by 4%. All said, we retain our Outperform call with an unchanged DCF-based TP of RM0.70. The new earnings contribution is inconsequential to the Group’s overall bottom-line.

• E-Idaman SB, via its wholly-owned subsidiary, Environment Idaman SB (EISB) provides waste and collection services for municipal waste under a 22-year concession from 19th September 2011 for the states of Kedah and Perlis. Barring unforeseen circumstances, the acquisition will be completed within 6 months from the date of SSA. We are positive on the acquisition as the expansion into the northern region will strengthen the Group’s environmental services portfolio. The acquisition is expected to be synergistic to the Group, through its existing subsidiary, Alam Flora and potential waste-to-energy solutions.

• Fair valuation. Based on the guidance given, the equity valuation of EIdaman SB is implied at the range of 4.5x-5.1x EV/EBITDA multiple, which we think it is fair given non-controlling stake in the company as compared to the previous controlling acquisition of Alam Flora in the range of 6-7x EV/EBITDA multiple. Our computation also shows that the expected EIRR from the acquisition is c.11-12%, assuming a stable growth rate of 3-4% per annum from 1,700 tonnes of waste produced per day currently in Kedah and Perlis. More upside could from E-Idaman being able to grow its non-concession business due to its strong presence in the northern region.

• Unchanged TP. Although the acquisition is expected to deliver a commendable EIRR, earnings accretion towards our FY24F-25F estimates is inconsequential at ~4%. We maintain our Outperform call and make no changes to our TP of RM0.70.

Source: PublicInvest Research - 30 Oct 2023