We see value emerging as dividend yields now hover over 5%, with Malakoff’s share price trailing the KLCI by 1.5% YTD. Maintain BUY and MYR2.18 TP (36% upside) as we like the stock for its:

1. Strong earnings visibility backed by long-term off-take agreements with Tenaga;

2. The commissioning of the TB4 power plant. We also see potential earnings upside as the plant site could accommodate additional power plant(s) with generation capacity of up to 1,000MW

Maintain BUY. We retain our BUY recommendation on the stock while keeping our DCF-derived TP at MYR2.18. This is based on a discount rate that is equivalent to Malakoff’s 6.6% WACC and TG rate assumption of 1.5%. Apart from its good earnings visibility backed by long-term power purchase agreements (PPAs) signed with Tenaga Nasional (Tenaga) (TNB MK, BUY, TP: MYR18.20) and the commissioning of Tanjung Bin Unit 4 (TB4) power plant driving FY16 earnings growth, we also like the stock for its attractive dividend yields of >5% over FY16F-18F. We believe there is also potential upside to earnings growth should it secure another greenfield power plant project as there is sufficient land for new power plant(s) with generation capacity of up to 1,000 megawatts (MW).

TB4 achieves commercial operation date (COD). Malakoff said TB4 COD on 21 Mar. TB4 is an ultra-supercritical coal-fired power plant with a generation capacity of 1,000MW. This would boost its total generating capacity locally to 6,346MW and the firm’s entire generating capacity to 7,036MW from 6,036MW (+17%). We expect the addition of TB4 to be a key earnings driver for FY16 while allowing for higher power generation to the grid over the longer term. Good earnings visibility. Malakoff has good earnings visibility, with the most of its plants on long-term offtake agreements with Tenaga that expire from 2022 to 2031. Meanwhile, its second smallest power plant domestically, Port Dickson Power (PD Power), has resumed operations from 1 Mar for another three years up to 28 Feb 2019 after executing a new PPA on 12 Feb 2016. Management guided for PD Power to contribute c.MYR20m pa to EBITDA, similar to the Segari Energy Ventures SB (SEV) plant.

Narrowing losses at Kapar Energy Ventures SB (KEV). Recall that losses at Malakoff’s troublesome 40%-owned power plant KEV narrowed in 4Q. We believe this proves that turnaround efforts are gaining good traction and would contribute towards its earnings growth going forward. Risks to our view. We make no changes to our forecasts. The risks to our earnings are lower-than-expected plant availability (due to unscheduled outages) that results in reduced capacity payments, interruptions in fuel supply and a sharp rise in interest rates.

Source: RHB Research - 22 Mar 2016