· We reiterate BUY on Malakoff Corporation with an unchanged DCF-derived fair value of RM2.10/share.

· Malakoff posted a 2QFY15 net profit of RM86mil (QoQ: -17%) to extend its 1HFY15 core earnings to RM190mil (YoY: +209%). The results were in line with our and consensus estimates, accounting for 47% and 44%, respectively. Hence, we maintain our FY15FFY17F estimates.

· As expected, no dividends were declared. We understand that the group will be paying its dividends in two tranches. A 3sen/share interim dividend was announced in 1QFY15. Our DPS forecasts, which are based on a 70% payout ratio, translate to yields of 4%- 6%.

· As management earlier cautioned, Malakoff’s earnings were sequentially softer in tandem with its lower capacity factor during the quarter. There were more scheduled maintenance outages (mainly at its Tanjung Bin and Prai power plants) as well as higher despatches from its coal-fired power plants given the lower coal prices.

· Additionally, the group registered a share of loss of RM26mil for its associates and JV in 2QFY15 vs. a gain of RM10mil in the previous quarter, following operational issues at its 40%-owned multi-utility KEV plant. Nonetheless, we are not too concerned as KEV’s longer-term prospects remain intact and contributions from its overseas ventures are still positive.

· On a cumulative basis, the significant improvement in Malakoff’s 1HFY15 bottom line was driven by higher contribution from its Tanjung Bin power plant, reduction in interest expense following the utilisation of its IPO proceeds to redeem its RM1.8bil Junior Sukuk Musharakah and higher interest income. Note that its 1HFY14 numbers include a one-off fair value gain of RM59mil from the acquisition of Port Dickson Power (PDP).

· Commenting on its near-term prospects, management said it is presently undergoing negotiations with the EC for a potential extension of its PDP PPA, which will expire in Jan 2016. It is also confident of meeting its scheduled COD of Mar 2016 for its upcoming Tanjung Bin Energy plant as the variance between its construction and scheduled completion has narrowed further to 3.3% from 5% in 1QFY15.

· Meanwhile, management also reiterated that it is not interested in bidding for Edra Global Energy Bhd’s brownfield power assets (total effective capacity of 5,594MW). Edra, which has been struggling financially given its high debt levels, is seeking a strategic sale for its power assets and development land as part of its restructuring effort. Known bidders include Tenaga Nasional, IJM Corp, Acwa Power, San Miguel Corp, and Sembcorp Industries.

· The stock is currently trading at an FY15F PE of 17x. Our fair value implies a forward PE of 26x.

Source: AmeSecurities Research - 24 Aug 2015