We are maintaining our HOLD call on Malakoff, post the announcement of its intention to acquire a 97.37% stake in Alam Flora (AFSB) for RM944.6m from its sister company DRB-HICOM. In our view, valuations may be on the high side at 12.8x FYE Mar 18, based on AFSB’s historical earnings growth of 4.8% over the past 2 years. Management believes that the acquisition will help provide new growth avenues for the company, to compensate for the declining earnings from its expiring power plants.

Valuation Range Has Factored in New Concession Wins

Although the value of the deal falls within the valuation range provided by the independent valuer of between RM875.2m to RM1,047.3m, part of the valuation has already assumed that AFSB will win new concession businesses in both Kelantan and Terengganu within the next 1-2 years. PBT for the existing business only grew by a CAGR of 4.8% over the past 2 years, which signals the importance of the new concessions to drive growth. Concession business contributed around 83.1% to AFSB’s revenue. Its current concession will expire in 2033.

Limited Leverage to Maintain Earnings Accretion

Based on our estimates, for the deal to be earnings accretive to Malakoff shareholders, debt financing should not be more than 43% (RM410m) of the overall transaction, due to the amortisation of goodwill it will need to recognise post acquisition. Malakoff has around RM1.3bn in cash on its balance sheet. We believe that the acquisition is valued at 12.8x FY18 PER, instead of the headline 9.8x FY18 PER, as AFSB was able to claim 100% tax exemption in FY18 which is unlikely to recur post acquisition.

Maintain HOLD With An Unchanged TP at RM0.94

We are maintaining our HOLD call and TP at RM0.94. The deal would still require the approval from multiple state and federal agencies, before both DRB-HICOM and Malakoff shareholders can vote upon the deal, and its targeted for completion by 1Q19. The deal is also classified as RPT due to its common majority shareholders.

Source: Affin Hwang Research - 2 Aug 2018