Malakoff’s (MLK) 2017 core net profit of RM270m (-27% yoy) came in below expectations - delivering only 87% of both our and consensus forecasts. The miss was due to another unscheduled outage in Nov/Dec at Tanjung Bin Energy (TBE), which resulted in lower capacity and energy payments. We cut our EPS forecast for FY18-19E by 7-20%, reduce our TP to RM 0.97 (from RM1.25), and downgrade our call to HOLD (from BUY) due to higher execution risk on earnings delivery.

More Problems at Tanjung Bin Energy (TBE)

During the analyst briefing, management guided that the lower margin for the quarter was due to TBE not receiving capacity payments in Nov/Dec due to an unplanned outage. As its rolling unscheduled outage rate (UOR) is above the 6% (at ~14%) threshold provided under its power purchase agreement (PPA), the impact to PATAMI was ~RM108m. Although the problem was only resolved at the end of January, we believe that the impact will not be as significant this quarter as it was in 4Q17, as MLK was able to bring forward some scheduled maintenance days to cover for the losses. The loss in capacity payment for TBE is around RM2m/day.

Higher Dividends Could Result From Higher Profits

As MLK generated close to RM2.7bn in operating cash in 2017, and sits on a cash pile of close to RM5.0bn, management has indicated that they have the ability to continue maintaining the dividend payout ratio at 100%, and is unlikely to change this ratio so long as the EPS for the year remains below 7.0sen. Nevertheless, management is still keen on growing the business, and is aiming for projects which can deliver double-digit returns on its equity investment. Currently, management is evaluating some greenfield projects in Malaysia and the MENA region.

Downgrade to HOLD Call With a Lower TP of RM0.97

We are lowering our EPS forecast of 2018-19E by 7%-20%, to incorporate lower capacity and energy payments, lower interest income (due to the higher dividend payout), lower contribution from its associate. As a result of the reduction in our EPS estimates, we also lower our DCF-based TP to RM0.97, and downgrade our call on the stock to HOLD due to higher execution risk. Key downside risk to our call would be more unplanned outages from TBE. Key upside risks are better cost controls and a lower tax rate.

Source: Affin Hwang Research - 22 Feb 2018