• Malakoff’s 1Q17 core profit (excl. forex) grew 17% yoy and 11% qoq to MYR99m due to stronger associate contribution and full quarter capacity payment for TBE.

• Against our estimates, 1Q17 core profits trailed our forecast at only 24.4% on lower-than-expected capacity factor but was broadly in line with consensus at 26.5%.

• We cut earnings by 22% in FY17 ahead of a softer 2Q17 in view of unscheduled outage at TBE and after revisiting our assumptions for Segari.

• Maintain HOLD with a lower TP of RM1.20. We are cautious over Malakoff’s earnings outlook mainly due to possible downside in TBE’s capacity payment in coming quarters. A decent start to a tough year

Malakoff posted an encouraging set of 1Q17 core earnings as earnings growth was driven by stronger associate contribution following higher contribution from the Middle East assets and lower losses recorded by KEV. TBE made its maiden full quarter capacity payment contribution. Despite the encouraging start to the year, 1Q17 core earnings accounts for only 24% of our full year estimates but was broadly in line with consensus.

Revenue gains sapped by higher O&M

While revenue improved 4% qoq to RM1.8bn, this was mostly offset by higher O&M expense as well as lower electricity sold to the grid. Management believes this could be due to its plants sitting lower in the dispatch order, superseded by newer and more efficient plants. Nonetheless, strong associate contribution and lower effective tax rate boosted qoq earnings growth.

Expect slower quarters ahead

Management note that TBE faced another unscheduled outage in 2Q, shortly after completing its scheduled maintenance in early May. While TBE is expected to resume operations on 26 May, the UOR (unscheduled outage rate) is already at 14%, well over the 6-8% limit. Thus, subsequent unscheduled outage would impact capacity payment. The UOR would be ‘reset’ in early May 2018. We pare down FY17-19F earnings by 19-22% as we also revisited our forecast assumptions. The lower contribution expected from TBE for FY17F and FY18F are partly offset by higher associate contribution and interest income.

Maintain HOLD

We retain our HOLD recommendation on Malakoff with a lower SOP-derived TP of RM1.20, implying FY17F PE of 19x. We believe the outlook for Malakoff remains challenging although we note that dividend yields at current levels appears decent at over 4%.

Source: BIMB Securities Research - 24 May 2017