Investment Highlights

• We maintain HOLD on Malakoff Corp Bhd (Malakoff) with a lower SOP-based fair value of RM1.12/share (vs. RM1.24/share previously) (WACC: 7.4%) as we trim our earnings. While valuations appear increasingly attractive, growth prospects remain opaque as we find execution wanting. Dividend yields no longer prove as attractive given our downward revision.

• Malakoff 2QFY17 core net profit of RM83.3mil (QoQ: -16%, YoY: +13%) brought 1H17 earnings to RM182mil (YoY: 7.3%). It missed our and consensus earnings estimates by 7% and 4% respectively.

• An interim dividend of 2.5 sen/share was declared, below our estimate of 3.5 sen/share. We adjust our DPS downwards to reflect a minimum 70% payout as opposed to a previously assumed 100% payout.

• Top line for the period grew 23% off higher coal prices and capacity factor attributed to TBP (2,100MW) despite TBE’s (1,000MW) planned outage. Elevated coal prices inflated energy income, driving 43% more in revenue as capacity income was marginally higher.

• Going forward, we expect full-year capacity income to decline YoY as Segari Energy Venture (SEV) will see close to 70% lower capacity rates arising from revised tariff rates in 2H. SEV’s contribution consists close to 30% of total capacity income.

• EBIT margins declined 2.5ppts to 19.4% for 1H17 on the back of higher fuel cost and a one-off recognition of an insurance claim amounting to RM58mil in the corresponding period as it more than offset lower O&M cost. The claim was on a rotor replacement at its Prai power plant.

• Meanwhile, Malakoff’s share of profit of its associates and JV contributed RM61mil (vs. –RM2mil previously) with a one-off RM20mil insurance claim arising from Kapar and turnarounds in its GCC assets. Disappointingly, Kapar remains operationally unprofitable as the 1987 power plant battles general aging and technical glitches. Meanwhile, management expects the prevailing tax rate to persist going forward.

• We lower FY17/18/19F earnings by 14%/6%/4% to reflect our more conservative SEV and Kapar contributions. The key re-rating catalyst to Malakoff is value accretive M&As while the key downside risks to our call are unplanned outages and lower-than-expected contributions from its associates.

• For an exposure to the power sector, we prefer Tenaga for its superior execution, earnings growth and cheaper valuations – trading at 10.0x CY18F.

Source: AmInvest Research - 22 Aug 2017