A well-known defensive name in the past decade, MALAKOF is making a comeback last month. It is still in the same business as before but with higher total effective installed capacity of 6,036MW (from 3,129MW), making it the largest IPP in Southeast Asia, and it is aiming to achieve 10,000MW by 2020. After two years of hiccups due to unplanned outages, earnings are set to normalise this year and expected to scale a record high in FY16 at RM603.4m which implies an inexpensive PER of 15.5x. However, earnings are seen easing in FY17 and set a new base from there as PD Power’s PPA expires. Nonetheless, this is not a concern should it is able to secure new PPA as planned. We initiate coverage with an OUTPERFORM rating with a price target of RM2.22/share. Besides defensive earnings quality, MALAKOF also offers decent dividend yields of 3%-4%.

A comeback kid. Malakoff Corp Bhd (MALAKOF) is not an unfamiliar name among investors as it used to be on the radar for its defensive play until it was taken private by MMC Corp Bhd (MMCCORP; OP, TP: RM3.03) in Apr 2007. MALAKOF was relisted on the Bursa Malaysia at an offer price of RM1.80/share or market capitalisation of RM9b mid of last month. The IPO issuance will raise c.RM1.8b, to be utilised to redeem the entire RM1.8b Junior Sukuk Musharakan.

The largest IPP in Southeast Asia. When it was delisted in 2007, it had total effective power generation capacity of 3, 129MW, which was mainly for local Independent Power Producers (IPP). Today, its effective capacity has grown to 6, 036MW, which is the largest IPP not only in Malaysia but Southeast Asia as well. In the past eight years, the capacity expansion was powered by the 90%-owned 2,100MW Tanjung Bin Power Plant, a few power and water plants in Middle-East and the 50%-owned Australian based Macarthur Wind Farms. With the new 1,000MW Tanjung Bin Energy (T4) and the expiry of PD Power’s PPA, MALAKOF’s total effective capacity will increase further to 6,600MW.

A better proxy to Malaysian IPP sector. Among the three main IPPs, MALAKOF has the longest remaining PPA life as three-quarter of its total effectively installed capacity will expire after 2024 while 1MDB (UNLISTED) is at 60%. The percentage-mix should increase further once the T4 comes into the system. In fact, MALAKOF targets to achieve total effectively capacity of 10,000MW by 2020. On the other hand, the country’s first IPP, YTL Power International Bhd (YTLPOWR; MP; TP: RM1.68) will completely exit the local IPP market if it fails to secure any new IPPs once the 1,212MW PPA for Pasir Gudang and Paka expire later this year and early next year, respectively.

Sustainable earnings streams. MALAKOF’s earnings took a dive in FY13- FY14, no thanks to the unplanned outage at the Tanjung Bin Power Plant. With the plant is now back into system, FY15 earnings will be normalised at RM450.6m before hitting a new high of RM603.4m in FY16 as the T4 kickstart. Nonetheless, earnings in FY17 is set to drop c.RM44m to RM559.5m due to the expiry of Power Purchase Agreement (PPA) for PD Power and this earnings base could remain until 2020 when the PPA for GB3 Power Plant expires if there is no add-on new capacity. In all, its earnings certainty is high, which is backed by the long-term PPA.

Initiating with OUTPERFORM at RM2.22/share. Under the current challenging market when everyone is searching for quality reasonably priced stocks, the relisting of MALAKOF is timely, which offers solid earnings visibility, reasonable share pricing and decent dividend yields of 3%-4% based on 70% payout. As such, we initiate coverage on MALAKOF with OUTPERFORM rating and price target of RM2.22/share which is based on a 10% discount to SoP. Key risks to our recommendation are: (i) major unplanned outage like the case in Tanjung Bin Power Plant, and (ii) T4 fails to take off or cost overrun.

Source: Kenanga Research - 8 Jun 2015