We are upgrading our call on Malakoff to a BUY from HOLD with an unchanged TP of RM1.25, as we believe that current valuation is undemanding, on the back of the -15% share price correction since May 17. 1HFY17 PATAMI at RM202m (-5.5 yoy) is tracking above our expectation but in line with consensus expectation, as lower cost during the quarter has helped offset the lower capacity payment in 2QFY17.

Cost Control Is the Key for Better Performance in 2QFY17

We were expecting a substantially weaker quarter in 2QFY17, due to the lower capacity payment for Tanjung Bin Energy (TB4) as it was penalised for the unplanned outages in May 17. However, impact from the lower profit was mitigated by better cost control during the quarter, and management has guided that the cost related to O&M is sustainable at this level. The cost for the outages on TB4 was close to RM52m in 2QFY17.

Capacity Payment Trend Is on a Decline

The overall capacity payment will continue to decline as Segari Energy Ventures’ (SEV) revised capacity payment is expected to be 70-80% lower for the next 10 years. We have factored in the lower capacity payment into our forecast; capacity payment from SEV is around 11% of Malakoff revenue for the 1HFY17. The impact to bottom line should be less, due to lower depreciation and also finance cost.

Potential Upside From Claims Towards IHI

Despite reaching a resolution with IHI on the losses related to Tanjung Bin Power (TBP); management was unable to provide guidance on the compensation Malakoff will be receiving, citing the confidentiality agreement of the deal. However, Malakoff will be able to recognise an exceptional gain, which can be used for a higher dividend payout.

Upgrade to BUY With An Unchanged TP at RM1.25

Our upgrade is mainly on valuation ground, as we believe that the current share price is undemanding. Management guided that they intend to maintain their payout of at least 70% of net profit. Based on a 5.0sen DPS for FY18E, the dividend yield at 4.9% should well support current share price. We have also tweaked our earnings to factor in the latest cost structure.

Source: Affin Hwang Research - 22 Aug 2017