Investment Highlights

• We maintain HOLD and a lower SOP-based fair value of RM0.89/share (vs. RM1.09/share previously) (WACC: 7.4%) as we roll over our valuations and trim our earnings on Malakoff Corp (Malakoff). Malakoff continues to see teething operational issues while a lack of substantive replenished assets further weighs on its outlook. A more aggressive dividend policy may prove supportive of valuations.

• Malakoff 4QFY17 core profit of RM43.7mil (YoY: -51.5%) brought FY17 earnings to RM215.2mil (YoY: -25.2%). Earnings disappointed, missing our forecast and consensus estimates by 27% and 31% respectively.

• A final dividend of 3.7 sen/share was declared (FY17: 6.2 sen/share). Going forward, management indicated the greater of 7 sen/share or 100% payout deviating from our earlier assumption of a 70% payout. It implies a yield of 7.7%.

• The disappointment in earnings precipitated from an unscheduled outage at Tanjung Bin Energy (TBE), experiencing a boiler leak in November. We also gather it suffered another unscheduled outage in Jan 2018 with operations resuming just recently. Since commencing operations in Mar 2016, it has suffered from 3 notable unscheduled outages. The current rolling unscheduled outage rate (UOR) hovers close to 14%, exceeding the 6% limit. However, management expects these occurrences to reach a tail end as teething issues are common within the first two years of operations.

• Effective tax rate was elevated at 36% due to i) more conservative stance on tax provision in relation to FY16 earnings; and ii) an additional tax on the IHI settlement amount. Effective tax rate is expected to normalise in FY18.

• Malakoff needs to replenish its expiring assets as Port Dickson Power (PDP) expire end-2018. Early indications suggest potential material M&As and greenfield projects are preliminary and may only materialize in FY19F, at the earliest. In the meantime, associate contributions are increasingly regular, anchored by its Bahrain and Oman assets.

• 1HFY18 earnings are likely to be weighed by TBE’s unscheduled plant outage and the 80% step down in Segari Energy Ventures’ (SEV) capacity income following the revised PPA rates in July 2017. However, 2HFY18 should see earnings pick up following the recovery in TBE and normalisation of its effective tax rate.

• Given the earnings shortfall, we cut our both FY18/FY19 estimates by 5%/9%. 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 unscheduled outages.

Source: AmInvest Research - 22 Feb 2018