• Malakoff’s 9MFY16 net profit of RM265.2m is below expectation, making up only 67% and 65% of our and consensus estimates respectively.

• Net profit fell 23.4% yoy mainly due to reassessment of residual value of gas power plant, lower contribution from PDP, higher maintenance cost, higher finance cost and forex losses.

• The reassessment of residual value on the gas power plant is in line with reduce in dependency of gas power plant in the future totalling up to RM53m.

• We downgrade our net profit forecast to RM349.8m and RM405m for FY16 and FY17 respectively with a lower target price of RM1.41. Maintain “HOLD”. TBE commissioned. Tg Bin Energy (TBE) achieved its commercial operation date on 21 Mar 2016. The 1,000MW ultra-supercritical coal-fired power plant has a 25-year PPA with TNB. Since commissioning, TBE has recorded satisfactory thermal efficiency. Thermal efficiency measure of the efficiency of a generator or power plant converts a fuel into heat and into electricity. During 3Q, TBE recorded 39% thermal efficiency equivalent compared to 34% from TBP. TBE’s recover in 3Q. TBE has made its first full quarter contribution in 2Q16 and currently contributed RM342.1m capacity payment and RM293m of energy payment. TBE has forced outages in June resulting to a low equivalent availability factor (EAF) at 50%. In the 3Q, TBE has recovered to achieve more than 80% of EAF.

Lower our dividend forecast. Malakoff has a dividend pay-out ratio policy of not less than 70% of its consolidated profit. During the second quarter, Malakoff has announced its first interim dividend of 3.5 sen for the current financial year, making out 82% of its 1HFY16 PAT. Based on our new earnings estimates, we expect a total dividend of 5.7 sen for FY17. This translates into a dividend yield 4.0%, which we deem attractive.

Reassessment of gas power plant. Power plants are depreciated based on the estimated useful life and its residual value. Malakoff has reassessed the residual value of its gas power plant this quarter due to reducing dependency on gas plant in future generation mix compared to coal. This reduces the chances of extension for existing gas plants.

Maintain Hold recommendation. We downgrade our earnings forecast due to higher cost and target price to RM1.41 (previously RM1.80) via our DCF methodology WACC of 6.7%. Wemaintain our HOLD recommendation as we foresee no new power plant for Malakoff in the pipeline. Management is looking to expand its energy portfolio in the domestic renewable energy in line with the government’s target of increasing renewable energy installed capacity to 2,080MW by 2020. With the experience and capability in the management team, we believe Malakoff will have a fair chance in securing some of the renewable energy projects in the country.

Source: BIMB Securities Research - 22 Nov 2016