Malakoff (MLK) reported a strong headline profit for 9M17, as PATAMI at RM266m (+0.4% yoy) was above our and consensus estimates. However, earnings were distorted by a compensation gain of RM110m (20% of 9M17 PBT). Stripping this off and normalising the tax rate, core PATAMI for 9M17 would have been c.RM220-240m, still above our expectations. Thus, we reaffirm our BUY call and TP of RM1.25.

One-off Boost of Around RM110m Came at the Right Time

We believe that MLK managed to record around RM110m in 3Q17 on its claim against IHI. The claim originated from a lawsuit regarding the failure of 22 different boiler-tube incidents at the Tanjung Bin Power station, which was filed in court in December 2015, and subsequently settled in August 2017. We do note that management had also previously guided that they were still evaluating their options to recover the cost (RM52m) for the unplanned outages on Tanjung Bin Power station (TB4) in 2Q17.

Higher Tax Effective Tax Rate Moving Forward

Without the compensation claim in 3Q, the overall PATAMI could have declined by over 59% qoq instead of the reported -38% qoq due to the higher effective tax rate at 59%. In the notes to the accounts, it was mentioned that the higher tax rate was due to an under-provisioning of prior years’ taxes in light of recent developments in the interpretation of tax regulations, despite the company recording an effective tax rate of ~33% for the past 3 years. Given the recent changes, we have also imputed a higher tax rate moving forward.

Reaffirm BUY Call With An Unchanged TP of RM1.25

We are raising our EPS for 2017E by 14% to incorporate the better performance, but lowering our 2018-19E by 4% mainly due to the higher tax rate. We are reaffirming our BUY call on the stock and DCF-based 12- month TP of RM1.25, as we believe the current valuation is undemanding, with an average dividend yield of around 5.1% over the next 3 years. Key downside risk to our call would be a higher cost structure.

Source: Affin Hwang Research - 22 Nov 2017