• Malakoff (MLK) reported a decent set of numbers, as 1H20 core-PATAMI of RM214.9m (+100% yoy) stood at 72% and 68% of market and ours full year forecast respectively
• The better performance, we believe, was supported by the higher contribution from its associate
• We have raised our EPS forecast for FY20-22E by 10%-13% to factor in the higher contribution, and also our TP to RM1.00. However, we downgrade the stock to HOLD, as valuations look fair

No Surprises From Local Operation

Although contribution from electricity sales have decline by 24.5% qoq, which resulted in a 15.1% qoq decline in overall revenue, it is not surprising to us, as we have already forecasted a lower electricity demand from the grid due there continue reduction in economic activities during MCO and RMCO. Despite the decline in electricity sales, the impact on bottom line is insignificant, as bulk of its profit for its local operation are derived from the capacity payment of its power plant. As the plant equivalent availability factor (“EAF”) for most of MLK plant continue to be above the threshold guided in the PPA in 2Q20, revenue for the capacity payment have only decline by a mere 2.1% qoq.

Underestimated the Contribution From Associates

Overall, the better-than-expected performance for the quarter, was due to higher contribution from its associates, where profits have increased more than 250% yoy. Apart from the lack of absence of the share of losses from its previous loss making associate, the consistent performance from Shuaibah has also helped to lift MLK profits. As we believe that the performance is sustainable, we are adjusting up our earnings to factor in the changes. We have not factored in the lower O&M cost into our forecast, as we believe that the reduction is mainly due to lower work done during the quarter, and is likely to trend higher in subsequent quarters.

Revising TP Higher to RM1.00; But Stock Is Already Fairly Valued

We have raised our EPS forecasts by 10-13% for 2020-22E to factor in better performance from associates, and also increased our SOTP-based 12-month TP to RM1.00. However, we downgrade our rating from Buy to HOLD, as we believe that the current share price has already fully reflected the improve contribution. Downside risk to our call would be unplanned outages of MLK’s power plant.

Source: Affin Hwang Research - 24 Aug 2020