4QFY19 results were a big let-down with core profit plunging 60% sequentially to RM25.8m owing to losses at associate KEV due to impairment, negative fuel margin and higher O&M costs. Addressing its falling earnings trend, the new acquired Alam Flora and additional stake in Shuaibah should help to partly fill the earnings gap. With valuations remaining attractive, we keep OP at TP of RM1.00, supported by >4% dividend yield.

4QFY19 missed expectations. 4QFY19 headline net profit of RM106.4m looked extremely strong which was due to: (i) RM557m of disposal gain on divestment in Macarthur Wind Farm (MWF),mitigating one-off losses due to (ii) RM420m impairment on investment in KEV, and (iii) share of loss of RM56m on KEV’s impairment of financial lease receivable (FLR). Ex-EI, 4QFY19 core profit was only RM25.8m bringing FY19 core profit to RM209.7m which fell short of house/street’s estimates by 14% and 17%, respectively. This was mainly attributable to RM32m losses posted by KEV due to negative fuel margin and higher O&M costs. It declared a final NDPS of 4.11 sen in 4QFY19, totalling FY19 NDPS to 6.55 sen which is higher than 5.6 sen paid last year and our FY19 assumption of 3.9 sen.

Hit by KEV yet again… 4QFY19 core net profit plunged 60% QoQ to RM25.8m from RM64.7m in the preceding quarter while revenue fell 6% which was due to lower energy payment by 14%. The decline in earnings was largely attributable to negative fuel margin and higher O&M costs at associate KEV which led to it posting RM32m loss. KEV’s misfortune was worsened by impairments of investment and FLR but this impact on the group was mitigated by a RM557m disposal gain in Macarthur Wind Farm. The accounting of the latter led to the group posting a headline net profit of RM106.4m versus a core net profit of RM25.8m.

... on impairment as well as negative fuel margin and higher O&M costs. YoY, 4QFY19 core profit contracted 70% from RM85.5m, which was largely due to share of loss of associate mentioned above against a profit of RM36.5m in 4QFY18 while revenue declined 9% which was due to lower energy payment which fell 17% that was also led by TBP and TBE. YTD, FY19 core profit dipped by 4% to RM209.7m, also attributable to the share of losses at KEV as mentioned above, while top-line was flattish at RM7.36b.

The completion of two M&A deals to fill up earnings gap. The additional 12% stake in Shuaibah acquired in Sep 2019 and the completion of Alam Flora acquisition in Dec 2019 should help to partly address the earnings gap issue. Besides, the company is still on the look-out for new assets, with some interest in the RE spaces. MALAKOF and its partner Touch Meccanica have been selected as one of the successful bidders in a competitive FiTebidding small hydro tender exercise by SEDA at two sites for a total 55MW. Although relatively small, it would help to boost up its earnings base.

Maintain OUTPERFORM for attractive valuations. While 4QFY19 results were disappointing, we still keep our FY20 estimate Postearnings release, we keep our estimates for now pending inclusion of Alam Flora earnings. We maintain our OUTPERFORM rating and target price of RM1.00 on the stock for its attractive valuation coupled with decent dividend yield of >4%. 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 - 20 Feb 2020