We understand that the government’s cancellation on Kapar’s 700MV gas-powered plant (40% owned by MALAKOF, 60% by TENAGA) to have a neutral impact on MALAKOF given that this is just a repowering proposal, with the existing PPA still remaining intact. Overall, we maintain our OP call and lowered SoP-TP of RM1.05, with the stock offering decent c.5% dividend yields at these levels.

Putrajaya cancels 4 IPP projects. Yesterday, news broke out that the government decided to cancel 4 independent power producers (IPP) projects – one of which is the 700MW gas-powered plant in Kapar (40%:60% owned by MALAKOF:TENAGA), with the remaining three being; (i) Aman Majestic and TENAGA’s 1,400MW gas plant in Paka, (ii) Sabah Development Energy Sdn Bhd and SM Hydro Energy Sdn Bhd hydropower plant at the Palm Oil Industrial Cluster (POIC) in Sandakan, Sabah, (iii) the solar power quota of 400MW to Edra Power Holdings Sdn Bhd for the utilisation of solar power plant.

Neutral impact towards MALAKOF. From our understanding based on our channel checks with management, this news should have a neutral impact towards MALAKOF. The Kapar power plant currently has 4 generating facility sites – 3 of which are thermal powered (with total generating capacity of 2,200MV), and 1 gas powered (with generating capacity of 220MV). PPAs for the first three thermal facilities are due for expiration in 2029, but the gas-powered facility is due for expiration in 2019. Originally, a proposal was submitted to the to repower this gas-powered facility to 700MW upon its PPA’s expiration in 2019 – it is this proposal that was referred to in the news, and thus, has no impact towards the existing on-going PPA (i.e. status quo remains), with no significant impact to earnings or valuations as we did not factor it into our assumptions. Note that Kapar power plant is currently loss making - RM30.2m in FY17, and RM12.1m in 1H18 (at MALAKOF’s effective stake of 40%).

Minimal risk in termination. Separately, management also opines minimal risk of termination for any of its other on-going PPAs within MALAKOF’s portfolio given the termination costs embedded in their agreements, while the four aforementioned terminations in the news should have no termination costs to the government as they are either proposals, or recently awarded that have yet to commence.

Maintain OUTPERFORM. While the news does not carry material impact to earnings and valuations, we have opted to slash our SoP-TP to RM1.05 – implying 0.8x PBV, which is -1SD from its average (from previous SoP-TP of RM1.20, implying 0.9x PBV at -0.5SD) after we widened our holding discount assumption to 30% (from 20% previously) amidst jittery market sentiment of late, exacerbating uncertainty in news flows. Assuming if we further exclude Kapar power plant entirely from our SoP-valuations (roughly RM600m valued at 1x PBV), we arrive to a hypothetical SoP-TP of RM0.95 – which still warrants an OUTPERFORM call. In any case, at these levels, the stock currently offers decent dividend yields of around 5%.

Risk to our call includes: (i) unplanned outages, (ii) higher-than- expected operating costs, and (iii) unexpected cancellation of existing PPAs.

Source: Kenanga Research - 26 Oct 2018