Despite improving sequentially, 1Q18 results came in below expectations due to continued unplanned outages in TBE and lower associates’ earnings. We gathered that TBE has resumed operations going into 2Q18 as rectification works have been completed. Thus, we would expect lesser outages going forward. Maintain OUTPERFORM with a revised target price of RM1.20, as we believe current prices have more than priced-in foreseeable negatives.

1Q18 below expectations. 1Q18 net profit of RM52.9m came in below expectations, making up only 18%/19% of our/consensus full-year estimates. We believe the mismatch was possibly due to: (i) lower- than-expected capacity income contribution from Tanjung Bin Energy Power Plant (TBE), caused by unplanned outages, coupled with (ii) poorer-than-expected performances from its associates. No dividends were declared, as expected.

Profits plunging from last year. 1Q18 net profit plunged 46% YoY, caused by: (i) significantly lower capacity income contribution from SEV Power Plant by 82% YoY, following its PPA extension that started in July 2017 with a significantly lower rate, (ii) lower capacity income contribution from TBE by 17% YoY, due to continued unplanned outages as the plant was affected by rectification works, and (iii) poorer contribution from associates, particularly its Shuaibah companies in Saudi Arabia (effective stake 12%), which contributed a loss of RM2.8m to MALAKOF this quarter due to some tax related adjustments, as compared to earnings contribution of RM13.9m in 1Q17.

However, earnings improved sequentially. On a QoQ-basis, 1Q18 net profit leapt 21%. The better sequential results were mainly attributed to improved earnings contribution from TBE due to higher capacity income contribution by 11% QoQ, coupled with an Availability Target Penalty (ATP) provision of RM84m made in the last quarter as the plant exceeded its allocated planned outage days.

TBE back to normal operations. TBE has seen more than its fair share of unplanned outages for the past few quarters, caused by rectification works on the boiler and electrical system. However, we gathered that the rectification works has now been completed, with the plant resuming to commercial operations on 22 Feb 2018 as its boiler is in stable condition. As such, we are expecting lesser unplanned outages from the plant moving forward. Meanwhile, the severe rate cut in SEV following the PPA extension would pose further deterioration risk to FY18 earnings. Management has guided that it is still open to value accretive investment opportunities, backed by its healthy net- gearing, forecasted at 1.9-1.5x for FY18-19, as most of its borrowings are backed by corresponding PPAs.

Maintain OUTPERFORM. Following the results disappointment, we lowered our FY18-19E earnings by 17-8%, after adjusting for lower earnings contribution from TBE and associates, coupled with some fine-tuning to SEV’s capacity payment structure. As a result, our TP is lowered to RM1.20, from RM1.25 previously, after rolling forward our valuation base year to FY19, while keeping all our discounting rates unchanged. We believe the heavy sell-down in the past 20 months, with total price depreciation of 48% since end-Sep 2016, is overdone, having more than priced-in foreseeable negatives. Valuations of the share are backed by concession assets with theoretically stable capacity payments from the off-taker TENAGA.

Risk to our call includes (i) unplanned outages, (ii) higher-than- expected operating costs, and (iii) poorer-than-expected earnings contribution from JVs and associates.

Source: Kenanga Research - 24 May 2018