2QFY20 net profit of RM105.0m beat our forecast on higher associate income and lower-than-expected taxation. With KEV losses eliminated since 1QFY20, its earnings volatility is fairly low taking it back to concession-type stable earnings mode. We believe market is under-appreciating this fact. We continue to rate the stock an OP with revised TP of RM1.15. It also offers an attractive yield of >6%.

2QFY20 beat expectations. MALAKOF reported a 2QFY20 net profit which jumped 18% QoQ to RM105.0m, tallying 1HFY20 net income to RM194.1m which made up 58%/65% of house/street’s FY20 estimates. The reported profit includes an undisclosed settlement with GE, which we estimated at c.RM15m, in relation to the losses and damages incurred as a result of failure events occurred at TBE between Apr 2017 and Jun 2019. The strong results against our estimates were due to: (i) lower taxation, and (ii) higher-than-expected associate income. Meanwhile, it declared an interim NDPS of 2.8 sen (ex-date: 15 Sep; payment date: 16 Oct) in 1HFY20 which is higher than the 2.44 sen paid in the same period last year.

Earnings boosted by claim settlement. 2QFY20 net profit jumped 18% QoQ from RM89.2m, despite revenue falling 15%, due to the abovementioned settlement with GE. After reading through earnings from various assets, we believe the core earnings were fairly flattish and hence the settlement amount could be c.RM15m. Individually, while earnings for all local IPPs were well on track, its Prai Power Plant’s capacity payment was lowered by RM6.5m due to a 20-day forced outage in April while associate income increased by 9.7% to RM50.5m which was due to higher earnings from MCDOMCO in Oman. Alam Flora’s PATAMI fell to RM13m from RM15m previously. Meanwhile, the contraction in revenue was due to lower energy payment by RM251m as fuel cost declined.

Higher YoY earnings in the absence of KEV losses. On a YoY comparison, 2QFY20 and 1HFY20 net profits surged 101% and 63%, respectively, to RM105.0m and RM194.1m which were largely due to the absence of KEV’s losses (RM26.9m losses recorded in 1HFY19) after it was written down by RM433.3m to zero value in 4QFY19. In addition, there were new earnings from Alam Flora and the 12% additional stake in Shuaibah since 1QFY20. On the other hand, capacity payment was lower slightly by 2% or RM11.6m in 2QFY20 and 1% or RM7.4m in 1HFY20 as its Prai Power Plant faced forced outages as mentioned above.

Earnings looking better. With the kitchen sinking exercise on KEV in 4QFY19, forward earnings are expected to be stable in the absence of KEV losses. With new earnings from Alam Flora and 12% additional stake in Shuaibah, MALAKOF’s earnings are back to resilient mode. Post 2QFY20 results, we raised FY20/FY21 estimates by 11%/6% as we lowered taxation assumption and increase associate income projection. Correspondingly, FY20/FY21 NDPS are also raised proportionally with unchanged pay-out of 80%.

Keep OUTPERFORM. We turned positive on the stock three months ago with the new assets coming online with low earnings volatility. As such, we maintain our OUTPERFORM rating which is also supported by an attractive yield of >6%. We have also switched back to SoP- driven valuation from PBV applied during the market meltdown. Our new target price is RM1.15, which is based on 20% holding company discount to its SoP of RM1.41, from 4-year PBV mean of 0.93x at RM1.02. Risk to our recommendation is unplanned outages which would lead to lower-than-expected earnings.

Source: Kenanga Research - 19 Aug 2020