3QFY19 results came within expectations which saw TBE earnings stabilising and KEV’s losses narrowing. Besides, repayment of RM560m debts should also ease interest expense ahead. However, the building up of new earnings assets is still ongoing which may dampen its share price. Nonetheless, with valuations remaining attractive; we keep OP at TP of RM1.00, supported by c.5% dividend yield.

3QFY19 matched expectations. 3QFY19 headline net profit of RM94.5m looked extremely strong which was bolstered by a RM29.8m revaluation gain arising from the existing investment in Shuaibah following the completion of the additional equity stake acquisition from Khazanah. At 76%/74% of FY19 estimates, 9MFY19 core profit of RM183.7m met expectations of ours and consensus. There was no dividend declared during the quarter as it usually pays half-yearly dividend.

Sequential results skewed by lower taxation. 3QFY19 core profit of RM64.5m rose 23% QoQ from RM52.3m largely due to lower taxation by 55% or RM32.4m for adjustment due to the overprovision of taxation in the prior year. In addition, (i) interest expense also fell 10% or RM24.9m due to RM560m debt repayments, (ii) higher associate incomes by 88% or RM8.5m to partly reflect the doubled-up equity stake in Shuaibah to 24% and, (iii) higher capacity payment for TBE by 5% or RM7.3m on lower unplanned outages. Another positive note was reduced losses at KEV by 25% or RM5.3m on lower O&M costs.

TBE recovered to help pushed earnings higher than last year.

YoY, 3QFY19 core profit surged 127% from RM28.5m as 3QFY18 results were hit by unplanned outage at TBE while 3QFY19 results were partly attributable to lower taxation and interest expense as mentioned above while associate income was also higher by 27% or RM3.8m on the abovementioned higher income from Shuaibah and narrowed losses at KEV. YTD, 9MFY19 core profit jumped 37% to RM183.9m from RM134.0m in 9MFY19 for the similar reasons as the normalisation of earnings for TBE as well as lower taxation and interest expense.

Busy looking out for new assets to fill up earnings gap. MALAKOF has been busy with M&A as well as monetising existing assets, such as the acquisition of additional stake in Shuaibah, the disposal of Macarthur Wind Farm, the impending acquisition of Alam Flora and bidding for the large scale solar (LSS) 3. MALAKOF via collaboration with Touch Meccanica has submitted a bid to SEDA for two sites of 55MW. And, its 60%-owned 2.4MW biogas project in Sg Kachur, Johor is in the process of awarding the EPCC contract. In addition, it has also signed a MoU with J-Power to develop potential greenfield and brownfield power/water projects. Management also mentioned that it is looking for Water and RE projects in Middle East but these are still in the early stages. All these could eventually help to address the earnings gap issue.

Keep OUTPERFORM for attractive valuations. Post-earnings release, we keep our estimates for now. Nonetheless, the acquisitions mentioned above, which we have yet to include in our forecast pending completion of the deals, should help to address the shrinking earnings and valuation issues. We maintain OUTPERFORM rating and target price of RM1.00 on the stock for its attractive valuation coupled with decent dividend yield of c.5%. Our target price is based on 30% discount to its SoP valuation. Risks to our call include unplanned outages, higher O&M costs and higher-than-expected KEV’s losses.

Source: Kenanga Research - 21 Nov 2019