• Malakoff has proposed to acquire a 49% stake in E-Idaman for RM133m, giving it exposure to waste management services in Perlis and Kedah.

• We view the deal positively as it strengthens the company’s position in waste management services in addition to being earnings accretive.

• Reiterate Add with a DCF-based target price of RM0.80.

Proposed Acquisition of a 49% Stake in E-Idaman

• In a Bursa filing on Friday, 27 October 2023, Malakoff announced that it has entered into a conditional sale and purchase agreement with Metacorp Berhad for the proposed acquisition of a 49% stake in E-Idaman Sdn Bhd for a cash consideration of RM133m.

• According to the agreement, any upward/downward adjustment to the purchase consideration should not exceed 5%.

• Most of the balance 51% shareholding is held by Cenviro Sdn Bhd, a majority-owned investee company of Khazanah Nasional and SK Ecoplant as a shareholding partner.

• The company expects the acquisition to be completed within 6 months. Background on E-Idaman

• E-Idaman is primarily involved in collection and disposal of municipal waste under a 22- year concession granted by the government of Malaysia in September 2011 for the provision of solid waste collection and public cleansing management services in the states of Kedah and Perlis.

• With more than 170 solid waste collection vehicles, E-Idaman is capable of handling an average of 1,450 tonnes per day of solid waste across 350,000 premises, in addition to running public cleaning services.

Initial Take: An Earnings-accretive Acquisition

• In 2022, E-Idaman registered a revenue and net profit of RM293m and RM28m, respectively, implying an acquisition multiple of 9.6x P/E, which we find reasonable for a concession-type asset with a remaining 10-year tenure.

• Assuming all else remains equal, profit levels hold and taking into account loss of interest income, we estimate incremental earnings of ~RM9m for Malakoff from the proposed 49% associate stake, potentially enhancing overall group 2024F PAT by ~4%.

• That said, E-Idaman is expected to record a significant increase in revenues, according to the announcement. However, there were no details provided for this.

• Apart from the earnings accretion, we view the deal positively as it further strengthens the group’s waste management and environmental solutions segment. Currently, Malakoff owns the concession to provide solid waste management services in Kuala Lumpur, Putrajaya and Pahang, handling ~3,200 tonnes per day.

• We have an Add rating on Malakoff with a DCF-based RM0.80 TP (WACC:9.1%). While 1H23 earnings were disappointing due to the negative fuel margins realised, we expect earnings and, in turn, cash flows to show improvements in subsequent quarters on the back of more stable coal prices. Key re-rating catalysts: earnings-accretive RE capacity expansion and a recovery in dividends going into 2024. Downside risks: negative fuel margins remaining persistently high and unplanned plant outages.

Source: CGS-CIMB Research - 30 Oct 2023