Although 3QFY20 results missed forecast with core profit falling 41% QoQ to RM57.6m, we remain positive on MALAKOF as the results were weighed down by a higher one-off outage maintenance cost at TBE. With KEV losses eliminated since 1QFY20, its earnings volatility is fairly low taking it back to concession-type stable earnings mode. We continue to rate the stock an OP with unchanged TP of RM1.15. It also offers an attractive yield of >6%.

3QFY20 below. 3QFY20 result came slightly below our forecast with core profit falling 41% QoQ to RM57.6m bringing 9MFY20 core profit to RM250.4m which accounted for 68% of our forecast partly owing to a one-off outage maintenance costs estimated at >RM22m registered in 3QFY20 for TBE. However, the results were within market expectation, at 75% of consensus forecast. No dividend was declared as expected as it usually pays half-yearly dividend.

Sequential result weighed by lower TBE earnings. 3QFY20 core profit contracted 41% QoQ to RM57.6m from RM97.6m in 2QFY20 with revenue dipping 2% over the quarter due to lower energy payment by 7% on planned maintenance at GB3, TBP and TBE. The decline in earnings was largely due to a lower earnings contribution of RM42m from TBE which was a claim settlement with GE in 2QFY20 and it incurred higher outage maintenance cost in 3QFY20. We had earlier estimated c.RM15m GE claim settlement and we now believe that it is likely to be higher at c.RM20m while the remaining should be the outage maintenance cost. Meanwhile, Prai Power Plant’s capacity payment normalised at RM33.9m after an outage in 2QFY20 while associate income was flattish at RM49.7m. Meanwhile, Alam Flora’s PATAMI was also flattish at RM13m.

Higher YoY earnings as it no longer equity account of KEV. YoY, 3QFY20 core profit fell 11% from RM64.7m, while revenue contracted 19%, primarily owning to the abovementioned weakened TBE earnings which was partly mitigated by in the absence of KEV losses as RM15.5m was posted in 3QFY19, 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 that boosted associate income from this asset to RM22.8m from RM14.2m last year. YTD, 9MFY20 core profit jumped 32% to RM250.4m, despite revenue contracting 16%, due to the abovementioned new Alam Flora earnings of RM42m and a 12% additional stake in Shuaibah.

A stable earnings prospect. Despite 3QFY20 missing our forecast slightly, we remain positive on the company’s earnings prospects given the elimination of KEV losses coupled with new earnings from Alam Flora and additional stake in Shuaibah. This makes its forward dividend sustainable. Post-3QFY20 results, we trimmed FY20/FY21 earnings estimates by 7%/4% to mainly account for the one-off cost for TBE in 3QFY20 for FY20 while adjustment for FY21 is mainly for fine-turning based on 3QFY20 results for other assets as well as cash-flow adjustment. Correspondingly, FY20/FY21 NDPS are also raised proportionally with unchanged pay-out of 80%.

Maintain OUTPERFORM. We remain positive on the stock especially since their new assets came online and it also no longer equity account of KEV. This leads to low earnings volatility. As such, we maintain our OUTPERFORM rating which is also supported by an attractive yield of >6%. Target price maintained at RM1.15, which is based on 20% holding company discount to its SoP of RM1.41. Risk to our recommendation is unplanned outages which would lead to lowerthan-expected earnings.

Source: Kenanga Research - 25 Nov 2020