1Q19 results are satisfactory with net profit rising 27% from last year on the back of higher capacity payment and lower interest costs. However, it needs to find new source of earnings to fill up the gap arising from PD Power’ expiration in February for which we believe Alam Flora is a good fit. It ventures into RE would also help to broaden earnings base. Keep OUTPERFORM at lowered target price of RM0.90, supported by c.5% yield.

1Q19 within expectations. At 28%/27% of house/street’s FY19 estimates, 1Q19 net profit of RM67.0m came within expectations. There was no dividend declared during the quarter as expected as it usually pays half-yearly dividends.

Earnings led by higher capacity payment and lower finance cost YoY. 1Q19 net profit jumped 27% YoY to RM67.0m from RM52.9m in 1Q18 on the back of a 25% hike in revenue. The improved results were largely driven by: (i) higher capacity payment by RM11.4m which was led by higher capacity payment at TBP by RM31.2m as there was no unplanned outage in the quarter, and (ii) lower interest expense of RM12.7m which was due to the capitalisation of finance costs of jetty construction. However, this was offset by higher O&M cost of RM11m. Meanwhile, associate company, KEV turned to losses again at RM7.1m from profit of RM2.4m in 1Q18.

High O&M costs hit sequential results. QoQ, 1Q19 net profit fell 22% from RM85.5m in the preceding quarter despite revenue rising 6%. This was largely attributed to higher O&M costs by RM42m for TBP’s scheduled outage work as well as lower contributions from associate income by RM20.0m as KEV turned loss-making as well as lower incomes from SWEC and Hidd Power assets. The higher top-line was led by higher energy payment by 9% sequentially. On the other hand, depreciation charge was higher after normalising from a lower amortisation of c-inspection cost in 4Q18, as PPE increased.

Awaiting new business to fill earnings gap. Following the tariff cut for SEV, earnings may decline further as the PPA Extension for PD Power had already expired in Feb 2019 albeit at small yearly capacity payment of c.RM45m. As such, MALAKOF is in urgent need to get new source of earnings to fill the gap. In this respect, we are so far positive on the acquisition of Alam Flora, albeit a related-party transaction; as it jives well with the group’s long-term aspirations of venturing into the waste-turn-energy and RE sectors. Meanwhile, the completion of the acquisition is expected by 3Q19 given the extension of fulfilling the conditions precedent of the SSA to 31 Jul from 31 Jan, pending approval from the authorities.

Still OUTPERFORM for attractive valuations. We reduce our target price to RM0.90, implying FY20 PER of 18x, from RM1.00 based on unchanged 30% discount to its SoP valuation as we roll over valuation base-year to FY20 from FY19 as NPV for IPP declines over time. Nonetheless, the Alam Flora acquisition, which we have yet to include in our forecast, should be valuation enhancing once it is completed. Keep OUTPERFORM for its attractive valuation coupled with decent yield of c.5%. Risks to our call include unplanned outages, higher O&M costs and higher-than-expected KEV’s losses.

Source: Kenanga Research - 28 May 2019