We believe TBE has moved beyond its troubled past (of high unplanned outages) and is expected to receive full capacity payment by 2019. Anecdotally, Manjung 4’s performance normalised after a 24-month hiccup period. We have raised our 2019 net profit forecast by 5% to reflect the better TBE performance. We have also raised our dividend payout assumption to 100%, translating to attractive 6.0% and 7.5% net dividend yields for 2018 and 2019 respectively. Maintain BUY. Target price: RM1.05.

WHAT’S NEW

Operational improvement from TBE… Malakoff Corporation’s (Malakoff) Tanjung Bin Energy (TBE) is expected to record higher availability and production in 2Q18 vs 1Q18. This follows rectification works on the boiler and electrical system, which was completed in Jan 18. TBE returned to commercial operations on 22 Feb 18 and it has been stable since then.

…as UOR will meet PPA conditions by year-end. We are positive on the developments. We note that while the 2Q18 TBE unplanned outage rate (UOR) is likely in the double-digit region, the UOR is trending downwards and will be able to meet the 6% UOR threshold set out in TBE’s power purchase agreement (PPA) by the year-end. To recap, 1Q18 UOR was at 15% and this resulted in a 17% yoy drop in TBE’s quarterly capacity payment to RM124m. The run rate for TBE is approximately RM600m.

STOCK IMPACT

Inflection point for TBE, operationally. Anecdotally, the Manjung 4 power plant owned by Tenaga Nasional (TNB) with a similar power plant design and configuration as TBE, faced similar teething issues as TBE for approximately 24 months. Thereafter, Manjung 4 was able to perform well within its design capacity. We believe TBE will also exhibit similar traits and as a result, we are more sanguine on the operational performance of TBE from 2H18 onwards. To recap, TBE had been plagued with multiple unplanned plant shutdowns due largely to the boiler and tubes repairs, at the equipment manufacturer’s expense.

Other domestic assets performing well within expectations. Malakoff has a 26% generation market share in Peninsular Malaysia. Apart from TBE, the company’s domestic assets have maintained a generally high equivalent availability factor. We note that the group’s 100%-owned PD Power’s PPA will expire in Feb 19.

Potential repowering of PD Power, strategically located near load centre. The company is currently evaluating the potential re-powering of the 440mw open-cycle gasfired power plant when its PPA ends in Feb 19. We believe there is a fair chance for the regulator to repower PD Power (up to 700MW) due to its strategic location of being 1.5 hours away from Klang Valley (load centre). At this juncture, PD Power is one of three open cycle power plants in Peninsular Malaysia, more commonly known as peakers. The other two peakers are: a) Edra Global Energy’s 434MW Powertek; and b) TNB’s 625MW Putrajaya power plant. In the event the regulator decides not to repower PD Power, we understand that PD Power can be dismantled and sold to emerging countries like Bangladesh or Africa at higher than scrap values. We estimate the power plant is worth c. RM50m-60m as it can be sold as a modular open cycle system.

EARNINGS REVISION/RISK

Raised 2019 net profit forecast by 5%, assume no unplanned outage for TBE. We are penciling in “normalised” capacity payment of RM600m for TBE for 2019 – following the recent meeting with the company, who is confident that TBE’s UOR will reach 6% by the year-end. Our 2020 earnings forecast already reflects a normalised capacity payment.

Dividend payout raised given adequate cash flow. We are also raising our dividend payout assumption from 80% to 100% (similar to 2017’s level) as the absence of a major plant up in the near term will see a dramatically lowered capex of RM100m-150m. The capex for 2018 remains high at RM400m but this is mainly for the TBE jetty expansion, which is expected to be completed by 1Q19. Thereafter, maintenance capex is estimated at less than RM100m. Based on our revised dividend payout assumption of 100%, 2018- 19 net dividend yields are at 6.1% and 7.5%, which we believe is sustainable.

Sequentially stronger associate earnings expected. We expect associate earnings to normalise into 2Q18. Note that associate earnings fell 52% yoy in 1Q18 due largely to a one-off RM12m higher tax expense recorded at the Shuaibah water treatment plant (WTP). Stripping this out, Shuaibah would have contributed net profit of RM9m to 1Q18 associate earnings.

VALUATION/RECOMMENDATION

Maintain BUY and SOTP-based target price of RM1.05. At our target price, the stock trades at 16.8x 2019F PE and 7.3x EV/EBITDA. The 3,000MW coal-fired power plant in Tanjung Bin accounts for 60% of our RM5.3b SOTP valuation. Key re-rating catalysts include: a) brownfield power plant acquisition; and b) greenfield power plant awards in Malaysia, Southeast Asia and the Middle East.

The stock offers net dividend yields of 6.1% and 7.5% for 2018 and 2019 respectively. We believe the attractive net dividends will cushion price downside.

Source: UOB Kay Hian Research - 9 Jul 2018