After the strings of costs incurred previously, MALAKOF has reported its 2nd quarter of consistent earnings in 4Q16, which came within our estimates. Forward earnings are expected to be at current levels until the new PPA extension contract for SEV starts in June this year for which we expect a 50% reduction in capacity payment. Nonetheless, this has already been factored in our DCF-derived SoP valuation. As it managed to report improving results for the 2nd consecutive quarter, interest should return in this deep-value stock again. OUTPERFORM maintained at price target of RM1.66.

FY16 in line. MALAKOF reported FY16 results which came in within our expectation with core profit of RM333.1m in FY16 coming <1% above our estimates but beat consensus estimates by 16%. We believe consensus could have taken in a RM82m (or after tax of RM53m) higher depreciation for residual values for all gas-fired power plants and an RM38m additional taxation charges for T4 as the plant’s completion, both in 3Q16 as nonrecurring items whereas we took it as a recurring operating item. Note that, the core profit for FY16 includes: (i) RM58m insurance claim in 2Q16 on rotor replacement, and (ii) RM31.6m in 4Q16 provision after its associate unit, Almiyah Attilemcaina (AA) was convicted for an alleged breach of foreign exchange regulations involving a sum of USD26.9m. It has filed an appeal. A final NDPS of 3.5 sen was declared, totalling FY16 NDPS to 7.0 sen, which is higher than our estimates of 4.6 sen, same as FY15.

Better 4Q16 finally. 4Q16 core earnings of RM121.8m, which excluded RM31.6m provision as mentioned above, surged 137% sequentially from RM51.5m as 3Q16 results were impacted negatively by the abovementioned higher depreciation charges and taxation charges. Top-line grew 13% to RM1.71b in 4Q16 owing solely to higher energy payment for Tanjung Bin which rose to RM565.5m from RM372.9m, on higher capacity factor, which did not affect its bottom-line. The RM31.6m provision for AA pushed associate income to loss of RM1.4m from profit of RM22.2m. KEV also turned profitable with share of profit of RM1.7m from loss of RM1.9m in 3Q16.

Higher YoY numbers too. 4Q16 core profit leapt 14% from RM107.0m, on the back of 25% jump in revenue, mainly due to RM23m higher coal fuel margin owing to timing differences on billing to TENAGA. The higher revenue was due to the commencement of T4 in Mar 2016 but gave limited impact to bottom-line due to higher depreciation charges and interest costs. YTD, FY16 core profit fell 27% to RM333.1m from RM453.2m despite higher revenue by 15% from last year on the new contribution from T4. This was largely attributable to higher depreciation arising from the abovementioned change of residual values for gas-fired power plants as well as the newly included plant T4.

Still deep in value, OUTPERFORM retained. MALAKOF reported improved results in the past two quarters and we believe the worst could be over as it had already adjusted in 2H16, including depreciation as well as improving KEV numbers. Thus, we keep our FY17 estimates but expect earnings to decline in FY18 on the full-year impact of new extension PPA for SEV which is set to take effect by Jun 2017 as we expect a 50% reduction in capacity payments. Hence, we introduce our new FY18 estimates with a 23% decline in earnings. We keep our OUTPERFORM rating and price target of RM1.66/share, which is based on an unchanged 10% discount to its SoP valuation. Risks to our call include unexpected plant outages, other unexpected costs incur by T4 and new losses at KEV.

Source: Kenanga Research - 21 Feb 2017