Investment Highlights

• We maintain HOLD and a lower SOP-based fair value of RM1.09/share (vs. RM1.12/share previously) (WACC: 7.4%) as we trim our earnings on Malakoff Corp (Malakoff). While valuations appear lofty against its regional peers (Exhibit 3), dividend yields may prove supportive.

• Malakoff 3QFY17 core loss of RM10.8mil brought 9M17 earnings to RM171.4mil (YoY: -13.2%). A one-off settlement relating to TBP operational issues of up to RM782mil in damages went undisclosed. However, other income amounted to RM75mil, which we think is the bulk of the actual settlement. Accounting for the exceptional item, core earnings missed our and consensus estimates by 9% and 12% respectively.

• Top line for the quarter grew 20% off higher coal prices. Reference coal prices were 43% more costly in 3QFY17 compared to the corresponding period. It was partially offset against lower capacity income registered by Segari Energy Ventures (SEV).

• The disappointment in earnings largely stemmed from:

i) SEV capacity income declining close to 80%, which is larger than our initial estimate of 70%. Prior to the step-down in capacity income due to the revised PPA, SEV’s contribution comprises close to 30% of total capacity income.

ii) Effective tax rate for the quarter ballooned to 60% against our expectations of normalization towards 30%. This was due to an under-provision of tax by RM65mil realised in the current quarter.

• Positively, associates income is increasingly stable. For the third consecutive quarter, it has registered between RM20mil and RM30mil. Cumulatively, it amounted to RM84mil (vs 9MFY16: RM20mil). It is primarily sustained by earnings from Shuaibah (Saudi Arabia) and Hidd (Bahrain) as Kapar Energy Ventures (KEV) continues to be operationally loss-making.

• To recap the lawsuit, Malakoff was in dispute of RM782mil in damages against several parties including IHI Corporation Japan (IHI). This was in relation to operational issues suffered at TBP power plant (2,100 MW), which saw 22 different boiler tube failure incidents.

• Given the earnings shortfall, we conservatively trim our FY17/FY18 estimates by 5%/7%. The key re-rating catalyst to Malakoff is material value accretive M&As and better than-expected contributions from its associates contribution while the key downside risks to our call are unplanned outages.

Source: AmInvest Research - 22 Nov 2017