• 2Q18 core profit was flat qoq as gains from TBE’s steady recovery and associates were offset by higher effective tax rate.

• On yoy period, 2Q18/1H18 earnings fell 30%/34% respectively amidst lower capacity payment and fuel margin under SEV’s new PPA; 1H18 core earnings were inline at 50% of our FY18F.

• An interim DPS of 2.1sen was declared, slightly lower than the 2.5sen declared in 2Q17.

• Maintain HOLD with an unchanged DCF-derived TP of RM1. TBE’s stable operation provides steady cashflow stream but recent plan to acquire Alam Flora exposes Malakoff to new risks.

Steady recovery offset by higher tax

2Q18 core earnings was flat qoq as gains from higher capacity payment for TBE as well as associate contribution were offset by higher-than-expected effective tax rate. The latter resulted from restructuring of internal debt relating to SEV which is being converted into redeemable preference shares.

Weaker yoy on lower SEV capacity payment

Over the yoy period, 2Q18 and 1H18 core earnings declined 30% and 34% respectively. These were due to lower capacity payment and fuel margin for SEV under its new PPA which was extended from 1 Jul 2017 to 30 Jun 2027. Overall, 1H18 core earnings were inline with our FY18F estimates at 50% but trailed consensus at 46%.

TBE/TB4 updates

Management noted that the unscheduled outage rate (UOR) for TBE moderated to 13.5% (1Q18: over 15%). Based on EC’s daily generation data, we note that TBE has been online for 88 days out of the 92 days in 2Q18. Management expects TBE to dip below the permissible 6% UOR sometime in early 2019 for better surety of capacity payment in the event of an unscheduled outage.

Other updates

Malakoff also announced the divestment of its 20% stake in the Lekir Bulk Terminal S/B for RM90m in 3Q18. The asset sale would net a gain of RM55.3m. Updates on the Alam Flora (AF) acquisition remains scarce as management is still working out the best capital structure to fund the acquisition.

Maintain HOLD with unchanged TP of RM1

While the stable performance of TBE points to a steady recovery for Malakoff, we believe its plan to acquire AF could pose an additional set of earnings risks. Still, we note that our current forecast (which have not factored in AF’s contribution) implies an attractive dividend yield of more than 5% over FY18-20F.

Source: BIMB Securities Research - 24 Aug 2018