MALAKOF is acquiring a 49% equity stake in E-Idaman Sdn Bhd for RM133.2m, a company with a concession (expiring 2033) to manage solid waste in Kedah and Perlis. While earnings enhancement is small (c.5%), the latest deal speaks for MALAKOF’s efforts in looking for new earnings streams. Pending the completion of the deal, we keep our forecasts, TP of RM0.63 and MARKET PERFORM call.

MALAKOF is acquiring a 49% equity stake in E-Idaman Sdn Bhd (EISB) from Metacorp Bhd for RM133.2m. EISB provides waste collection and disposal services for municipal waste under a 22-year concession (from 2011 to 2033) granted by the federal government for the provision of solid waste collection and public cleaning management services for Kedah and Perlis. EISB reported net profit of RM27.7m in FY22 with a total equity of RM137.3m. The balance 51% equity stake in EISB is owned by Cenviro Sdn Bhd (a majority owned investee company of Khazanah). The acquisition is expected to be completed within the next six months.

The acquisition is valued at 9.8x FY22A PER and 2.0x FY22A PBV which we believe to be fair given that MALAKOF’s acquisition of Alam Flora of 10x PER and 3.3x PBV in Aug 2018.

Based on our estimates, the acquisition will boost our FY24F earnings by c.5% and our SoP-valuation by 2.0 sen/share, and raise its net debt and gearing of RM7.17b and 1.43x as at end-Jun 2023 to RM7.31b and 1.46x, which are still manageable.

More importantly, this latest deal speaks for MALAKOF’s efforts in looking for new earnings streams to replace its expiring PPAs. Two of its power plants had already expired recently, i.e., the 436MW PD Power Plant in Feb 2019 and 640MW GB3 Power Plant in Dec 2022. In addition, the PPA of its 350MW Prai Power Plant will expire in 2024, 1,303MW SEV Power Plant in 2027 and 40%-owned Kapar Power Plant in 2029.

Forecasts. Maintained, pending the completion of the deal.

While we like MALAKOF for its earnings stability underpinned by IPPs and concessions, there is room for improvement in its risk management to reduce or even eliminate the unnecessary earnings volatility such as unplanned outage as well as fuel margin fluctuation. We maintain our MARKET PERFORM call at unchanged SoP-derived TP of RM0.63. The stock is supported by a decent dividend yield of >5%. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Risks to our recommendation include: (i) regulatory risk, (ii) unplanned outages leading to lower capacity payment thus affecting earnings, (iii) non-compliance of ESG standards set by various stakeholders, and (iv) earnings volatility stemming from fuel margin gains or losses.

Source: Kenanga Research - 30 Oct 2023