Although causing near-term loss of an earnings stream, the disposal of Macarthur Windfarm will result in an immediate disposal gain of RM546m, making it a good deal. And, the earnings gap is easily made up by the recently completed additional stake acquisition of Saudi assets. However, we do not expect any special payout as it is for future expansion and the current yield is good enough at c.5%. Keep OUTPERFORM at target price of RM1.00.

Monetising its Aussie windfarm. Yesterday, MALAKOF announced that its indirectly wholly-owned unit Skyfirst Power Sdn Bhd has entered into a conditional Share and Unit Purchase Agreement with Megawatt Financing Pty Ltd and AMPCI Macarthur Wind (T) Pty Ltd to dispose its entire 50% participating interest in the Macarthur Wind Farm (MWF) in Australia for AUD356.85m (c.RM1,020.5m @ 2.8597/AUD). The disposal is expected to be concluded in 1QFY20. The 420MW windfarm, located c.16km east of the town of Macarthur in south western Victoria, has been operating since Jan 2013 with concession period running to Jan 2038.

Short-term earnings dip but it is a good offer. While MALAKOF is facing a 21% fall in earnings based on RM56.6m contributions from MWF in FY18, the disposal price tag is indeed a good offer as the future value of the loss of an 18-year earnings stream of RM1,020.5m (RM56.6m x 18 years) matches the disposal price which appears attractive based on present value. And, the loss of RM56.6m earnings stream is also fairly close to the new add-on earnings of RM47.5m (based on FY18) from the additional stakes in Saudi Shuaibah water and power assets which were acquired last month. Furthermore, MALAKOF paid USD70m for the additional Saudi assets with 10 years remaining concession periods while it expects to post RM546m disposal gains from this MWF divestment which seems a good trade- off.

RM600m cash war chest. After repaying MWF loan of AUD140m and transaction costs of AUD6.4m, MALAKOF should have AUD210.5m or c.RM600m balance from the disposal which can be used for other expansion plans. So far, MALAKOF is in the mist of acquiring Alam Flora and bidding for LSS3. We understand that MALAKOF is in the final stage of negotiating to dispose PD Power’s assets where its PPA Extension Contract had expired in Feb while the site can be utilised to bid for a future power plant, either a conventional or green energy plant. On the other hand, the completion of acquisition of Alam Flora has been delayed and is now expected to be completed by 1QFY20, pending approval from the authorities given the likely change in tariffs which could impact the acquisition price as well. These two acquisitions should put MALAKOF’s earnings growth back on track.

Attractive valuation; keep OUTPERFORM. We keep our estimates unchanged as the net impact of MWF disposal and the additional stake acquisition of Shuaibah is minimal, while pending completion of Alam Flora’s acquisition. With unchanged 30% discount to its SoP valuation, our target price is maintained at RM1.00, implying FY20 PER of 19.7x. We maintain our OUTPERFORM rating on the stock as we believe the depressed share price is attractive with the recovery in earnings as TBE is back in order while the additional stake acquisition in Saudi Shuaibah’s assets and impending Alam Flora acquisition are earnings accretive. In addition, MALAKOF also offers 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 - 30 Oct 2019