• 3Q18 core profit was down 51% qoq but earnings surged on yoy basis due to low base effect in 3Q17 after excluding compensation from a dispute settlement.

• 9M18 core earnings fell 20% on lower capacity payment for TB4 and fuel margin for SEV (ie. in 1H18); core earnings trailed ours and consensus forecasts at 63% and 65% respectively.

• We pare down our 2018-20F estimates following further outages in TB4, higher effective tax rates and lower dispatch from the gas fired power plants.

• Maintain HOLD with a lower DCF-derived TP of RM0.82. Despite the limited earnings catalyst, we see limited downside at current levels while the stock offers attractive dividend yields.

TB4 stutters again

3Q18 headline net profit rose 14% qoq and fell 9% yoy mainly due to a one off gain worth RM55.3m from divestment of its 20% stake in Lekir Bulk Terminal to Tenaga in early Sept 2018. Adjusting for this and other one offs, core earnings fell 51% qoq following another round of outage at TB4 during the quarter from Sept 10 till the end of 3Q18.

Surged off a low base in 3Q17

Over the yoy period, 3Q18 core earnings surged but was due to a low base effect. To recap, 3Q17 headline earnings were inflated by a one off compensation received following a dispute settlement with IHI, the vendor that provided TBP’s boiler. Overall, 9M18 core earnings fell 20% to RM154m and trailed ours and consensus estimates at 63% and 65% respectively.

A more conservative stance

Based on the Daily Logsheet report released by the Energy Commission, unscheduled outage at Malakoff’s TBE/TB4 stretched from 10 Sep to 23 Oct before it resumed on 26 Oct. Management noted unscheduled outage rate (UOR) for TBE stood at 19% after moderating to 13.5% at end 30 Jun. We cut our 2018F estimates by 20% as we expect 4Q18 performance to remain weak. We pare down 2019/20F by 30%/14% on the back of higher effective tax rate assumed and lower contribution from the gas-fired power plants amidst lower dispatch rate.

Downgrade to HOLD with lower TP of RM0.82

This lowers our DCF-derived TP to RM0.82 (from: RM1) as we also roll our valuation forward; downgrade to HOLD. Malakoff’s share price has fallen by some 17% since announcing the Alam Flora (AF) purchase. While the acquisition would boost Malakoff’s cashflows, the earnings accretion is dependent on the funding structure and AF’s tariff hike. Still, we believe downside risk is limited at current level while dividend yields are fairly attractive at over 5%.

Source: BIMB Securities Research - 26 Nov 2018