Review

• Malakoff’s FY16 core net profit of RM351mn (-20% YoY) trailed expectations, accounting for 88% of full-year estimates. The shortfall mainly stemmed from:- 1) lower contribution from Tg. Bin Energy (TBE) plant due to high outage in 4Q16 caused by high boiler temperature and high vibration in its steam turbine, 2) lower dispatch for Prai and GB3, and 3) higher taxes in 4Q16 following a one-off tax charge at TBE upon completion of the plant. In Dec-16, TBE’s availability and capacity factor dipped to a low of 63%/55% from 94%/85% in Oct-16.

• Headline net profit of RM356mn (-22% YoY) includes:- 1) insurance claim for rotor replacement (RM54mn), 2) provision for penalty claim for Algerian operations (RM36mn), and 3) FX loss (RM13mn).

• Overall, it was a tough FY16 as the group grappled with challenges from multiple fronts, including:- 1) teething issues at TBE, 2) higher depreciation charges for gas plants, 3) additional barging and demurrage costs, 4) dip in despatch rates for Prai and GB3, and 5) accounting losses from TBE due to IC4 recognition. To recap, Malakoff slashed the residual value of its older gas plants on the back of challenges in securing PPA extensions at favorable rates.

• With the exception of Algeria’s Souk Tleta water operations, all other international subsidiaries performed well, particularly:- 1) Kapar Energy Ventures: narrowed losses of RM28mn (FY15: RM61mn) following UOR reset, 2) Al Ghubrah (Oman): turnaround to RM6mn profit (FY15: 16mn loss) following rectification of warranty defects, and 3) Shuaibah (Saudi Arabia): profits expanded 63% YoY due to lower scheduled outages. On the flipside, for Algerian operations, in addition to court penalty provisions, the plant is currently undergoing rehabilitation due to equipment failure.

• The group declared 4Q16 DPS of 3.5 sen, bringing total FY16 payout to 7 sen (FY15: 7 sen). This implies higher payout rate of 98.5% (FY15: 77.3%).

• We expect weaker profits in FY17, underpinned by:- 1) increasing downtime for TBE in Mar-17 for rectification works, 2) lower dispatch for Prai and GB3, 3) lower capacity payment for Segari due to commencement of a new 10-year PPA in Jun-17, and 4) higher interest costs for TBE following debt refinancing. To recap, levelised tariffs for Segari’s new PPA (start: Jun-17) will be lower versus the original PPA. In addition, management guided for higher total scheduled outage in FY17 of 398 days (FY15: 381 days).

• The above would more than offset positive profit drivers, including:- 1) lower scheduled outages at Tg. Bin Power (TBP) and Segari, and 2) additional 3-months contribution from TBE which commenced operations in end-Mar-16.

Key Takeaways from Conference Call

• In essence, the group’s 36% JV at Algeria, Almiyah was convicted for alleged breach of FX regulations for USD27mn. Malakoff’s corresponding maximum liability is circa RM53mn. However, management is hopeful of writing back its RM36mn provision upon successful appeal of the court’s judgement.

• There is a possibility of lower capacity payment (CP) for TBE in FY17 given that the plant has breached its 2nd threshold for unscheduled outage rate (UOR) of 8%. On the bright side, the plant is entitled for full CP during its 46-day scheduled outage in Mar-17 for rectification works.

• Due to IC4 accounting recognition, TBE reported losses of RM37mn in FY16 but generated positive cash flow of RM125mn in FY16. Moving forward, management expects improved results from TBE at the subsidiary level, on the back of increased thermal efficiency, and lower interest costs following debt refinancing.

• TBE will refinance its Junior Term Loan (Equity Bridge) of RM1.3bn (due: Mar-17) via:- 1) RM800mn perpetual sukuk at TBE, to be treated as equity, and 2) RM500mn sukuk at holding co. level (target rating: AA-). Due to a longer financing tenure of 7-10 years, average interest rates will likely be higher at 5.3%-6.0% (current: 5.3%).

• Updates for large scale photovoltaic plant project:- 1) expected PPA signing date: Mar-17, 2) financial close by Aug-17, and 3) at this juncture, Malakoff is comfortable to undertake this project entirely on its own following the withdrawal of 49% JV partner, DRB-Hicom.

Impact

• We effect the following changes:- 1) roll forward our DCF valuation base year to FY17, 2) lower capacity factor for Prai and GB3, 3) raise cost of debt for WACC assumption higher, 4) revise holding co. net debt according to management’s renewed guidance, 5) increase capacity factor and thermal efficiency for TBE in FY18, and 6) reduce net debt at TBE to correspond with debt refinancing exercise. As a result, our FY17/18 forecasts are revised by -17%/16%, and our WACC is raised higher to 8.5% (previous: 7.7%).

Valuation

• Following the changes above, our SOP valuation for Malakoff is now reduced to RM1.45 (previous: RM1.70). We downgrade the stock to Hold from Buy previously. Near term earnings headwinds dampen sentiment on the stock despite its quality assets, TBE and TBP.

Source: TA Research - 21 Feb 2017