While 1Q17 results were fairly well on track, the unexpected unplanned outage at TBE early this month put MALAKOF’s earnings at risk in the near term. Although the loss is likely to be covered by insurance and EPC contractor, the claims would take some time to resolve and this is expected to suppress its share price further. In addition, active O&M activities in the coming quarters also mean future earnings would be under pressure and weak, unless a new M&A deal to bridge the earnings gap. Thus, we downgrade the stock to MARKET PERFORM with a lower target price of RM1.30/share.

1Q17 inline. MALAKOF’s 1Q17 net profit of RM98.8m was fairly within expectation, which made up 23%/26% of house and street’s FY17 estimates. However, as the Tanjung Bin Energy (TBE) faced 20 days of unplanned outage in May, immediately after a scheduled maintenance in 1Q17, MALAKOF will not receive capacity payments in 2Q17 as the UOR is now above the acceptable level of 6% at c.14% although it may claim from either the EPC, namely General Electric or the insurer in the future. There is no dividend declared in 1Q17 as expected.

Weaker sequential results on higher O&M cost. Operationally, 1Q17 performed fairly on track for the local assets after the two problematic associate companies, Kapar Energy (KEV) and Almiyah Attilemcaina (AA) were rectified and back in order. This has partly reflected in its topline which rose 4% QoQ. However, higher O&M costs by RM27m dragged its core profit lower by 19% to RM98.8m from RM121.8m previously. This was partly attributed to the scheduled maintenance for TBE mentioned above. As KEV and AA were being rectified, share of profits from associates turned profitable at RM32.7m from a loss of RM1.4m in 4Q16.

Better YoY numbers. 1Q17 core earnings rose 17% from RM84.1m in 1Q16 while revenue leapt 33% to RM1.78b from RM1.34b which is largely due to higher capacity payment from TBE. It was only in operation for 10 days in 1Q16 as it started operation in mid-March last year. The improved earnings were largely due to (i) higher fuel margin of RM46m, and (ii) shares of associate income surged 460% as mentioned above. But, these were partly mitigated by (i) higher depreciation by 22% on change of residual value for gas-fired power plants coupled with newly TBE, and (ii) higher O&M costs by RM30m.

Worst is not over yet. While 1Q17 results seemed to be alright, the unexpected TBE’s unplanned outage mentioned above will place MALAKOF’s near term earnings at risk. Based on our annual capacity payment assumption of RM660m for TBE, the 20 day unplanned outage plus 8 days of behind schedule for the planned outage would cost RM50m loss in capacity payment. Besides, Segari Energy (SEV) is having 69 days of scheduled maintenance in 2Q17, this means 2Q17 results are likely to be much weaker. In all, we cut FY17 estimate by 23% on (i) higher O&M costs, and (ii) effective tax rate raised to 30% from 25%. Meanwhile, FY18 forecast is reduced by 2% on cash flow impact.

Cut to MARKET PERFORM. With uncertainty of TBE’s unplanned outages, though it could be compensated by insurance claims and the EPC contractor, we expect share price of MALAKOF may continue to be suppressed. Hence, we decided to increase the discount factor to its SoP valuation to 20% from 10%, and coupled with the rolling over of valuation to CY18, our new price target post earnings revision is now reduced to RM1.30/share from RM1.66/share. In view of the gloomy outlook, we downgrade the stock to MARKET PERFORM from OUTPERFORM. Risks to our downgrading call include lower than expected O&M costs and lower than expected TBE’s loss of capacity payment.

Source: Kenanga Research - 24 May 2017