Still Hurting From TBE

Malakoff’s (MLK) 1QFY18 PATAMI of RM52.9m (-46.6% yoy) came in below expectations - delivering only 17% and 19% of both our and consensus forecasts respectively. This weak set of results is due to an unscheduled outage in Tanjung Bin Energy (TBE), which was only resolved by the end of February. Although MLK’s overall cost structure is lower, it is not sufficient to compensate for the revenue shortfall. We cut our EPS forecasts for 2018-20E by 2.6-7.5% and reduce our TP to RM0.94 (from RM0.97), but maintain our HOLD call.

Revenue Shortfall From TBE Continues

Although the shortfall in revenue for TBE narrowed in 1QFY18E by around RM12m compared to 4QFY17, the 2 months of unplanned outage have cost MLK around RM25-30m in capacity payments. The contraction in earnings was larger than forecast, as we had expected the situation to be resolved by end January, but TBE was only returned to full commercial operation at the end of February. Nevertheless, we are expecting a stronger 2Q, as MLK will benefit from the full capacity payments from TBE.

Lower Cost Is Good, But Still Lacking Growth Catalyst

While there are some significant savings due to the decline in depreciation, maintenance and finance costs yoy, this is insufficient to compensate for the lower capacity payments from TBE and SEV (renewal on lower capacity payment). While we believe that the current cost structure is sustainable moving forward, we think the biggest concern is Malakoff’s growth prospects, as earnings are likely to remain flattish for the next few years without contributions from new projects.

Maintain HOLD Call With a Lower TP of RM0.94

We lower our DCF-based TP to RM0.94 while maintaining our HOLD rating, on the back of the 2.6-7.5% earnings cuts for 2018-20E. 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 - 24 May 2018