• Malakoff plans to acquire DRB’s 97.37% stake in Alam Flora (AF) for RM944.6m. Preliminary numbers value AF at 7.2x PE based on FY18 (Mar FYE) earnings (earnings at DRB are tax exempt).

• While it diversifies Malakoff’s income stream, we are negative on the acquisition given potential earnings dilution from potential interest expense should the purchase be partly financed by debt.

• We also throw caution on the prospect of AF’s business model until there is more clarity by the government regarding its policy on solid waste management.

• Downgrade to NEUTRAL with an unchanged DCF-derived TP of RM1. We have not factor in AF’s earnings in our estimate pending update on the acquisition structure. Sell on strength.

Keeping it within the family

Malakoff announced plans to acquire DRB’s 97.37% stake in Alam Flora for RM944.6m. This would see Malakoff foraying into the Solid Waste Management sector with future plans to develop a waste-to-energy system that fits into its core power generation business. We note that this acquisition would also see DRB-Hicom strengthening its balance sheet, possibly ahead of investments into Proton by its partner.

A bit of background

Alam Flora provides a full suite of solid waste management services for the state of Pahang as well as Federal Territories of Kuala Lumpur and Putrajaya. Its service is bounded by a 22-year concession of up to 31 Aug 2033 (ie. 15 years remaining). AF’s services are under the ambit of the Solid Waste and Public Cleansing Management Act 2007 (SWPCMA) which transfers the executive authority on solid waste management and public cleansing in Peninsular Malaysia to the Federal Government from the local authority.

Our thoughts

We are not particularly bothered by the related party transaction (RPT) as this tend to be the group’s hallmark; something that the market is well acquainted with. Still, we cast a cautious tone on this transaction due to possible earnings dilution should it be partly financed by debt. Notwithstanding, the new government has been strong proponents of decentralisation especially on state/locale matters as reminded by YB Zuraida, the Housing and Local Government Minister (see here). This could put SWPCMA 2007 along with the concessions under uncertainty.

Downgrade to NEUTRAL with unchanged TP of RM1

We retain our DCF-derived TP of RM1 and downgrade our call on the stock to Neutral. Our forecasts have yet to factor in AF’s acquisition pending more clarity on the acquisition structure. Still, we advocate selling on strength.

Source: BIMB Securities Research - 2 Aug 2018