• Malakoff posted another weak quarter as TBE faced yet another unscheduled outage during the quarter. Core pretax profit fell 57% yoy to RM55m while that of FY17 trailed our estimates at 93%.

• There was a positive RM10m tax charge in 4Q17, mitigating the poor performance albeit still trailed our expectations to make up only 77% and 78% of ours and consensus estimates respectively.

• We cut earnings over FY18-20F by 7-23% as we assume a more conservative stance over its prospect. Management noted that TBE faced yet another unscheduled outage in Jan 2018.

• Downgrade to HOLD with an RM1.00 DCF-derived TP as we believe earnings outlook remain unattractive in the near to medium term which could also see downside risks to our dividend expectations.

TBE underpins qoq weakness

Malakoff’s 4Q17 net profit grew multifold on qoq basis but was due to a positive tax charge of RM10m. At the pretax level, adjusted earnings contracted 57% (ie. 3Q17 earnings adjusted for a one-off compensation received). The sequential weakness was mainly due to another unscheduled outage at TBE which was caused by a boiler tube leak in Nov 2017. Rectification works were throughout Dec 2017. Additionally, associate contribution also weakened by KEV and its Oman unit.

A challenging 2017

Overall, we estimate 2017 core earnings fell 19% to RM244m and was only 77% of our estimates. The decline was partially mitigated by an RM10m positive tax charge in 4Q17. At the EBITDA level, earnings were only 88% of our estimates. To some extent, the weakness is expected in view of Segari entering its PPA extension from 2H17 onwards albeit this was exacerbated by TBE’s operation setback (second setback in 2017) in Nov 2017.

A cautious revisit

We pare down FY18-20F earnings by 7-23%. FY18 saw the biggest cut as we factor in the following: i) TBE experienced another outage in early Jan 2018 too although management is appealing for the outage to be classified under scheduled maintenance, and ii) revisit our assumptions on the Gas-fired power plants ahead of RP2 which plans to substantially reduce generation mix by gas.

Downgrade to HOLD with RM1 TP

Downgrade to HOLD with a lower DCF-basis TP of RM1. The stability of TBE is concerning albeit management noted that these are typical teething issues for a new power plant. Nevertheless, we believe this is a key downside risk to earnings. On a more positive note, management aims to sustain its payout of 100% PATMI to translate to c.7sen DPS.

Source: BIMB Securities Research - 22 Feb 2018