2Q16 results were somewhat disappointing owing to the interest expense-off for the new T4. Nonetheless, this is expected to be one-off and earnings are likely to pick up in the coming quarters as T4 is aligned to the system which availability at 73% in 2Q16. Meanwhile, losses at KEV had narrowed compared to last year, which is an encouraging sign. We keep our OUTPERFORM call unchanged for now pending an analysts’ briefing later today.

1H16 below expectations. At 27%/29% of house/street’s FY16 estimates, 1H16 core profit of RM155.7m came below expectations owing to: (i) higher interest due to the expense-off on the interest incurred during the construction of T4 which we estimated at RM35m-RM45m, and (ii) higherthan- expected depreciation charges, mainly on T4. The core profit for 1H16 included an RM58m insurance claim on rotor replacement. A first interim NDPS of 3.5 sen was declared in 1H16 (ex-date: 06 Sep; payment date: 04 Oct) which is higher than the 3.0 sen paid in 1H15.

Hit by expense-off for T4. Despite revenue rising 14% owing to the fullquarter contribution from T4, 2Q16 core profit fell 15% sequentially to RM71.6m from RM84.1m. This was due to: (i) higher interest expenses by RM81.9m or 43% which included both new T4’s interest expense and the expense-off mentioned above, (ii) higher depreciation charges by RM34.8m or 12%, (iii) share of associate earnings turning to loss of RM7.7m from profit of RM5.8m as KEV was loss-making, and (iv) higher maintenance cost. Nevertheless, the downside was cushioned by higher interest income and lower taxation. Meanwhile, based on the above, contribution from T4 was likely to be lower than expected partly due to the new plant’s availability was at 73%.

Same trend for YoY numbers. On a YoY comparison, 2Q16 core profit declined 17% from RM86.3m in 2Q15 although revenue leapt 18% compared to a year ago which was largely due to T4. The weaker set of results were attributed to the same reasons as mentioned above on higher depreciation charges, interest expense and maintenance cost. However, share of loss from associate income was reduced from RM26.3m in 2Q15 to RM7.7m. Similarly, 1H16 core profit contracted 18% to RM155.7m from RM190.2m in 1H15 although revenue rose 9%. All these were attributed to the same reasons mentioned above.

T4 to lead earnings growth from 3Q16 onwards. Although the weak results were attributed to T4, this new plant is expected to lead future growth from 3Q16 onwards as the interest expense-off incurred in 2Q16 is one-off. 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 as opposed to FY15 on lower anticipated maintenance cost. For now, we keep our estimates unchanged with downside bias, pending an analysts’ briefing later today.

Keep OUTPERFORM for now. Although 1H16 results were disappointing, we believe MALAKOF’s earnings prospect remains intact as the hiccup in 2Q16 is likely to be one-off as the future earnings are backed by the longterm PPAs. Our OUTPERFORM rating and price target of RM1.97/share are maintained for now pending an analysts’ briefing today.

Risks to our call include unexpected plant outages and prolonged losses at KEV.

Source: Kenanga Research - 18 Aug 2016