EBITDA remains intact despite the noises

Malakoff reported a relatively weak set of 3Q16 results, as its core net profit at RM280mn only constituted 58% and 57% of ours and consensus forecasts, respectively. However, we are upgrading our call to BUY, due to undemanding valuation, while maintaining our DCF-based TP at RM1.65, as the miss in profit is attributed to higher depreciation and also higher tax rate for the quarter (which is one-off in nature).

EBITDA remains intact, one-offs disrupt the bottom line

Overall, we believe that Malakoff is on the right track, given the EBITDA delivered for 9MFY16 at RM2bn accounted for 80% and 75% of ours and consensus forecast. We are keeping our full year DPS at 7.2sen, as the cash flow is not impacted by the change in depreciation schedule, and the higher effective tax rate for the quarter is also one-off in nature.

A more prudent approach leads to change in depreciation

Management has taken a more prudent view on the terminal value of its gas powered plant, as it believes the value of its plant should be in tandem with the tenure of its PPA, as PPA extension for its existing plant should be view with less certainty in nature. Although the higher depreciation is expected to continue over the lifecycle of the PPA, there is no impact to the MLK cash flow nor the IRR for the plants.

Finally, a turnaround for its associates

Management has finally deliver on its guidance for its associate, as they were able to deliver a small profit, which was previously loss making. Kapar Energy Venture which was the biggest drag in associate earnings, has managed to reduce its losses significantly, from RM25mn in FY15 to RM1.9mn so far in FY16.

TB4 still not yet profitable

Tanjung Bin Energy (TB4) is yet to be profitable, due to teething problems which lower its efficiency and also higher cost related to the coal-handling facilities. Management believe that the teething issue will be resolve by next year, and the new jetty will be completed by 2018.

Upgrade to BUY with an unchanged TP of RM1.65

We are upgrading our call to BUY, as we believe that the recent valuation is undemanding, and the recent drop in share price is unwarranted. Despite the lower net profit, its cash flow remains intact, hence we are not changing our DCF-based 12-month Price Target of RM1.65 (WACC: 6.2%).

Source: Affin Hwang Research - 22 Nov 2016