We are not overly concerned about MALAKOF’s slow start in 1Q16 as the new T4 should deliver full earnings impact from 2Q16 onwards. Operationally, all local IPPs were on track in 1Q16 except PD Power due to Gen1 PPA expiring while the extension PPA came with lower rates. However, this is not an issue and MALAKOF is poised for a good FY16. We keep OUTPERFORM with a new TP of RM1.97/share.

A slow start in 1Q16. Although 1Q16 reported earnings only made up 15% of house/street’s FY16 estimates, we deem the results to be broadly in line given that T4 which commenced on 21 Mar, will have full impact from 2Q16 onwards while the extension of PPA for PD Power, which started on 1 Mar should fill the earnings gap albeit a small contribution. There was no DPS declared in 1Q16 as opposed to 3.0 sen paid in 1Q15 and 2.0 sen paid in 4Q15, which was not alarming as our payout is based on its dividend policy of 70% minimum and it distributed 77% of its earnings in FY15.

QoQ, lower capacity payment and higher MI. Sequentially, 1Q16 net profit contracted 21% to RM84.1m from RM107.0m as revenue slid 2% over the quarter to RM1.34b from RM1.38b previously. This was mainly attributable to: (i) normalisation of MI to RM15.4m from RM1.1m, and (ii) lower capacity payment which was reflected in the topline, by 2% or RM11.8m to RM557.0m from RM568.8m. The lower capacity payment was owing to lower payment from PD Power of RM13.0m from RM35.9m previously as the PPA for the Gen1 IPP expired on 21 Jan and the new extension PPA came with lower rates effective on 1 Mar. But, this was mitigated by the maiden T4’s contribution of RM19.0m in 1Q16.

Higher opex hit YoY numbers. On a YoY comparison, 1Q16 net income declined 19% from RM103.9m although revenue remained flattish from RM1.34b previously. This was due mainly to higher opex led by a RM17.5m or 6% hike in depreciation, outages at Tanjung Bin for C-Inspection. Meanwhile, interest income dropped RM7.0m or 15% on lower interest on RULS from associated companies while share of profits from associate and JV also reduced to RM5.8m from RM10.1m as KEV, Al Ghubrah of Oman and Souk Tleta of Algeria incurred losses of RM9m, RM3m and RM4m, respectively. On the other hand, 1Q16 capacity payment fell 3% or RM16m from RM573.0m mainly owing to lower payment for PD Power as mentioned above. On a positive note, interest expenses were reduced by RM24.3m or 11% following the full redemption of RM1.8b Junior Sukuk Musharakah.

T4 to lead earnings growth from 2Q16 onwards. With the PPA extension of PD Power to Feb 2019, T4 which has come on-stream in Mar will be the new earnings drivers. On the other hand, the operational issue at the 40%- owned associate KEV is unlikely to be resolved in the near-term, but it is expected to fare better in FY16 given lower maintenance cost anticipated. As such, we are keeping our FY16-FY17 earnings estimates for now.

Still OUTPERFORM. We remain upbeat on MALAKOF’s earnings prospect, as it is backed by the long-term PPAs, which is not reflected in its share price, in our opinion. We roll over our valuation base-year to CY17 from CY16 with unchanged 10% holding company discount to its SoP; thus, our new price target is now RM1.97/share from RM2.07/share. OUTPERFORM call reiterated. Risks to our call include unexpected plant outages and prolonged losses at KEV. 

Source: Kenanga Research - 24 May 2016