Malakoff (MLK) reported a decent set of results, as 1Q20 PATAMI of RM97.4m (+78% yoy) is above both ours and consensus estimates, delivering 33% and 35% of our respective forecast. The better performance was due to lower operating expenses and higher contribution from the associates. We believe that the lower operating expenses is not sustainable, as it is dependent on the O&M schedule. However, the improved contribution from associates is likely to stay. As such, we are upgrading our EPS forecast by 4%-6% for 2020-22E, but keeping our TP unchanged. Upgrade to BUY from Hold.

Lower Demand But Limited Impact on Profit

Although revenue contribution has decline by 10% yoy, EBITDA was flattish yoy, as the reduction in revenue was mainly related to the lower electricity sales, which margin is minimal. The lower electricity sales (energy income) were due to lower demand from the grid. Most of the profit contribution for MLK is derived from the capacity payment of the power plants, hence as long as MLK is able to maintain the plant equivalent availability factor (“EAF”) above the threshold guided in the PPA, MLK profit should be shield the demand shortfall.

Better Contribution From Associates; Lower O&M Expenses

We believe that the better than expected performance for the quarter, was due to higher contribution from its associates and the lower O&M expenses. O&M expenses tend to fluctuate quarter to quarter, as it is mainly based on the maintenance schedule, as such we believe that the RM29m reduction is cost yoy is not sustainable. The improved contribution from the associates is due to the absence of share of losses from Kapar (fully written off in 4Q19), and the recovery in Shuaibah performance. We believe that the recovery is more likely to be sustainable, hence we have tweak our earnings to factor in the changes.

Keeping TP Unchanged at RM0.95, Upgrade Due to Valuation

Despite revised up our EPS forecast by 4%-6% for FY20-22E, to factor in the better performance from its associates. We are keeping our SOTPbased TP unchanged at RM0.95, however we are upgrading our call to BUY from HOLD mainly due to valuation. Risk to our investment thesis would be unplanned outages of MLK’s power plant.

Source: Affin Hwang Research - 22 May 2020