• Malakoff’s (MLK) performance fell short of our and consensus expectations, as 2020 core-PATAMI of RM313m (+88% y-y) was only 93% of our and consensus full-year forecasts
• Miss can be attributed to the lower contribution from associates, whose income contracted by 38% qoq in the 4Q20
• We are lowering our SOTP-based TP to RM0.92 and maintaining our HOLD call, as we believe a lack of growth catalysts will limit share-price upside

Core Malaysian Operation Remains Stable

We believe that the overall power generation remained stable in 4Q20, given that the EBITDA for the quarter rose by 9% qoq, which is a good indicator that MLK’s power plants did not have any major unplanned outages issues. The uptick in revenue during the quarter could also be attributed to higher electricity sales to the grid, as demand has started to normalise as more economic activities resume operations. Nevertheless, minimizing unplanned outages is crucial for MLK’s profitability, as MLK will continue to receive capacity payments regardless of demand from the grid as long as the equivalent availability factor (“EAF”) remains above the threshold guided in the PPA.

Time Is Running Up for New Growth Avenues

Given that around 17% of MLK’s generation capacity is expiring in 2023/24, we believe that it is important for MLK to seek new avenues of growth within the next 2-3 years to compensate for the potential loss of income. Although MLK has been actively seeking opportunities within the renewable energy space in Malaysia, we believe that the recent wins are still insufficient to compensate for this as the contracts secured are for less than 10MW, but the loss in capacity is around 990MW. Alam Flora’s plans to expand into the state of Terengganu and Kelantan seems to have stalled, despite completing the acquisition in late 2019.

Maintain HOLD Rating as Current DPS Is Not Sustainable, in Our View

We are lowering our EPS for 2021-22E by 7-15% to factor in the latest quarterly performance. The decline in 2023E earnings and dividends is due to the expiry of GB3 PPAs. We believe that the growth outlook for MLK will remain challenging as we believe the government is unlikely to issue any new tenders for conventional power plants until 2023/24. As such, we are lowering our DCF-derived SOTP-based 12-month TP to RM0.92 (previously RM1.00), while maintaining our HOLD call. Downside risk: unplanned power outages at MLK’s power plants; upside risk: new power plant project wins.

Source: Affin Hwang Research - 22 Feb 2021