Malakoff’s 1H15 results disappointed due to losses from 40%-owned Kapar power plant. We cut our FY15-17 earnings forecasts by 13%, 11% and 4% respectively and TP by 9% to MYR2.18 (55% upside), butmaintain our BUY call. We like Malakoff for its solid earnings visibility and strong growth prospects, driven by a new power plant and potentialexport opportunities. Dividend yields are attractive at 5-7%.
Kapar the culprit. Malakoff’s 1H15 net profit missed expectations, coming in at only 41%/44% of our/consensus full-year forecasts. The key culprit was share of MYR16.2m net loss from associates (vs our full-year forecast of share of MYR140m net profit), which came largely from theKapar power plant. We had expected this 40%-owned associate to turn around in FY15, backed by a recovery programme that was put in place since FY14 to overcome various operational issues. Malakoff stated that it has no “management control” over this massive 2,420 megawatts (MW) multi-fuel power plant which is 60%-owned by Tenaga Nasional (TNB MK, BUY, TP: MYR15.53), and believes that it is more realistic to expect a full recovery in FY16.
Forecasts. We cut our FY15-17 earnings forecasts by 13%, 11% and 4% respectively, largely to reflect lower contributions from the Kapar power plant.
Risks to our view: i) lower-than-expected plant availability achieved (due to unscheduled outages), resulting in reduced capacity payments, ii) interruptions in fuel supply, and iii) delays in the completion of greenfield power plant projects.
Maintain BUY. We like Malakoff for its: i) strong earnings visibility backed by long-term power purchase agreements (PPAs) signed with offtakers, ii) earnings growth driven by Unit 4 of the Tanjung Bin power plant that will come on-stream in FY16, boosting its effective generating capacity by 17% to 7,036MW from 6,036MW, and iii) export opportunities given the proximity to Singapore and Thailand and the availability of sites to accommodate more power plants. We reduce our DCF-based TP by 9% to MYR2.18 (from MYR2.39) to factor in: i) the reduced earnings forecasts, and ii) a higher discount rate that is equivalent to Malakoff’s WACC of 6.6% (from 6.3%). This is following the upwards revision in RHB’s equity risk premium assumption to 6.7% from 5.9%. Its dividend yields are attractive at 5-7%.
Source: RHB Research - 24 Aug 2015
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