• We maintain HOLD and an SOP-based fair value of RM1.09/share (WACC: 7.4%) on Malakoff Corp (Malakoff). We think lofty valuations against its regional peers (Exhibit 1) may limit its near-term upside potential. M&A-driven catalysts are unlikely to be immediately earnings accretive, contributing to an unexciting earnings outlook. Decent dividend yields between 3.9% and 4.2% should be supportive of valuations.

• Key takeaways from Malakoff’s conference call:

i) Malakoff is unable to disclose the affirmative IHI settlement amount as it is bounded by confidentiality restrictions. However, management alluded that the amount could be derived from its other income. This amounts to RM119mil, which is a shortfall against the disputed amount of RM782mil. The after-tax impact is a one-off gain of RM91mil.

ii) While management previously guided for effective tax rate to normalise from 2QFY17 onwards, it ballooned to 59% instead. This was due to two factors: 1) Malakoff took a more conservative stance by provisioning with more tax in relation to FY16 earnings; and 2) additional tax on the IHI settlement amount. Going forward, management expects effective tax rate to normalise to 25% in FY18.

iii) Malakoff signalled its intention on its capability to maintain its DPS of 7 sen (vs. our FY17F projection: 4.1 sen) given its robust cash reserve of RM4.6bil as of end-Sep 2017. On the flipside, the company weighs its need to maintain a sufficient M&A war chest. We think it is imperative Malakoff undertakes further M&As to supplement its growth. Therefore, we opt for the minimum of 70% payout ratio asumption in line with the company’s dividend policy.

iv) Segari Energy Ventures (SEV) capacity income’s step-down was larger than expected, declining close to 80% (vs. our initial estimate of 70%). Management expects this existing capacity income to be sustained going forward. Recall, prior to the step-down in capacity income due to the revised PPA, SEV’s contribution comprises close to 30% of total capacity income.

• Post-results, we had earlier trimmed our earnings on Malakoff FY17/FY18 estimates by 5%/7% factoring in for: i) lower-than-expected Segari capacity income; and ii) higher-than effective tax rate for the quarter. While we learnt in greater detail and specifics to Malakoff’s 3QFY17 performance, it is insignificant for the purposes for adjusting our estimates. Therefore, we leave our earnings unchanged.

Source: AmInvest Research - 23 Nov 2017