We are positive over the proposed acquisition of 97.37% in Alam Flora, for a consideration of RM994.6m, as we (i) view valuations to be fair, (ii) acquisition to be earnings positive, and are comforted by its earnings certainty towards MALAKOF, and (iii) it jives well with the group’s long-term aspirations into renewable energy. No changes to forecasted numbers, pending further announcements. Reiterate OUTPERFORM, with TP of RM1.20.

Proposed acquisition of Alam Flora. Yesterday, MALAKOF held a briefing pertaining to its proposed acquisition of 97.37% stake in Alam Flora Sdn Bhd, from DRBHCOM (OP, TP: RM2.55), for a total cash consideration of RM944.61m. As at time of writing, MALAKOF has yet to make an announcement on Bursa, while DRBHCOM had already made the Bursa announcement. We are expecting MALAKOF to make the announcement later today.

Implied valuations of the acquisition. The proposed acquisitions are at valuations of 10x PER and 3.3x PBV based on FY18 March yearend numbers. And despite some initial scepticism given it is a related party transaction, after further studying, we ultimately think the acquisition valuation to be reasonably fair. Note that as independent valuers for the deal, Deloitte, had arrived to a fair value range of RM875m to RM1,047m, which implies to a valuation range of 9-11x PER, acceptable as compared to some Bursa-listed wastemanagement related companies, such as AWC at 8.8x PER, EDGENTA at 14.1x PER, and TALIWRK at 23.3x PER (all 1-year forward PERs). Furthermore, as per our understanding, Alam Flora is currently sitting on approximately RM400m in cash, and RM80m in borrowings, thus rendering MALAKOF’s net-cash outlay for the acquisition at only roughly RM545m, implying an EV/EBITDA of approximately c.7x.

Post-acquisition financial impact. We see the acquisition as an earnings positive towards MALAKOF, bringing in approximately an additional RM30m per year bottom-line earnings impact towards the group (or, representing roughly +13-12% of FY18-19E earnings). This approximation already takes into account roughly RM46m per year amortisation costs of intangible assets arising from the acquisition, which assumes no goodwill is to be recognised (RM686.8m provisional intangible assets, amortised straight-line over 15 years). Nonetheless, we note that these are non-cash financial expenses, and the acquisition will still definitely be accretive from an EBITDA or cash flow standpoint regardless. From the acquirer’s perspective, this would imply roughly 18x PER (based on RM30m earnings per year, and netcash outlay amount), which is still lower than current FY18-19E PER of around 21x. Additionally, we are further comforted by the compensation clause in the acquisition, whereby MALAKOF would be compensated should there be any tariff reduction within 24 months, thus shinning further certainty towards the acquisition’s earnings contributions. Note that the transaction is expected to be completed only in 1Q19, and as such, expect no earnings impact in FY18, and three quarters of earnings impact for FY19. Post-acquisition, expect net-gearing to be bumped up by around 0.1x, from FY18-19E net gearing of 1.9-1.5x and net-debt position of RM12.1-10.5b.

Reiterate OUTPERFORM, with maintained SoP-TP of RM1.20 (implies total returns of 20%). Overall, we are positive on the acquisition as it also jives well with the group’s long-term aspirations of eventually venturing into the waste-turn-energy and renewable energy. For now, we are keeping our FY18-19E numbers unchanged, pending the related announcement from MALAKOF later today, as well as its upcoming 2Q18 results anticipated to be released later this month. Risk to our call includes: (i) unplanned outages, (ii) higher-thanexpected operating costs, and (iii) fall through of proposed acquisition of Alam Flora.

Source: Kenanga Research - 2 Aug 2018