Investment Highlights

• We maintain HOLD on Malakoff Corp Bhd (Malakoff) with a lower DCF-based fair value of MYR1.24/share (vs. RM1.42/share previously) as we roll over our valuations. It implies an FY18F target PE of 21x. M&A-driven catalyst are unlikely to materialise in the near term, contributing to an unexciting earnings outlook. Decent dividend yields between 5.8%-5.2% should be supportive of valuations.

• Malakoff’s 1QFY16 registered a core net profit of RM99mil (QoQ: +11.2%, YoY: +3.1%). It was in line with ours and consensus of 27% and 25% of full-year forecasts respectively.

• Healthy top-line growth was largely driven TBE (1,000MW) and TBP (2,100MW), as it more than offset marginally lower contribution from Malakoff’s remaining power plants. However, we expect growth to normalise in the quarters ahead with TBE fully operational since Mar 2016. Meanwhile, energy payments to Malakoff’s older power plants declined 14% as the offtaker may have favoured more efficient power plants.

• EBIT margins contracted 1.8ppts to 20.4% on the back of higher fuel cost and accelerated depreciation post adjustment to the lower residual value of its gas-fired power plants. Notably, O&M saw an uptick as well.

• Malakoff’s share of profit of its associates and JV contributed RM33mil (vs. RM6mil previously) with turnarounds in its GCC assets. There was a spike in effective tax rate as well as earnings which came in marginally higher despite revenue growing 33% YoY.

• Going forward, we expect Segari Energy Ventures’ (SEV) extended PPA at lower rates to result in a softer 2H17. It could be partially mitigated by lower O&M cost in tandem with fewer scheduled outages for the remainder of FY17.

• Other briefing highlights included an update over its corporate exercise initiative. Malakoff is currently sizing up M&A deals and an encouraging pipeline of ongoing bids for large-scale solar PV in Malaysia. There is a growing need to replenish its PPAs, with Port Dickson Power and Lumut GB3 expiring in 2018 and 2022 respectively.

• Key re-rating catalyst to Malakoff is value accretive M&A and consistent execution. Downside risks are unplanned outages and lower-than-expected contributions from its associates.

• For an exposure to the utilities sector, we prefer Tenaga for its cheaper valuations – trading at 10.0x CY17F, execution and greater visibility of earnings growth

Source: AmInvest Research - 24 May 2017