Review

• Malakoff Corporation Berhad’s (MLK) 9M19 core net profit of RM182mn (+42% YTD) was within our expectations and consensus’- accounting for 73%/74% of full-year forecasts respectively. It was an impressive set of results, whereby Tg. Bin Energy (TBE) and MLK’s associates performed well.

• Core net profit excludes gain on remeasurement of Shuaibah investment (RM29.8mn). This was following MLK’s acquisition (completion: Sept-19) of an additional 12% stake in the latter. However, we included Macarthur Wind Farm’s (Macarthur) 3Q19 contribution of RM12mn into our core profit computation. Recall that MLK disposed its entire 50% participating interest in MacArthur to AMP Capital (target completion: 1Q20).

• QoQ bottomline surged 24% mainly due to: (1) higher contribution from TBE as the plant was affected by a 73-day Scheduled Outage (SO) in 2Q19, (2) lower finance costs from repayment of loans, (3) lower taxes due to one-off overprovisions in prior years, and (4) higher contribution from associates Shuaibah and Kapar Energy Ventures (KEV). TBE’s operations finally recovered in 3Q19 following completion of its extensive SO in 1H19. Correspondingly, its Unscheduled Outage Rate (UOR) has now reduced to less than 3% (PPA threshold limit: 6%).

• Shuaibah’s contribution expanded QoQ due to acquisition of additional 12% interest in Sep-19. This more than offset lower capacity payments from: (1) boiler tube leaks and deration at the power plant, and (2) natural deterioration of Seawater Reverse Osmosis (RO) membranes at the water plant. Nevertheless, following remedial measures, operations at Shuaibah are now on track to normalize before end-4Q19. Whereas in the case of KEV, lower Operations and Maintenance (O&M) costs led to improved QoQ contribution.

• Those factors above more than offset an increase in QoQ depreciation and O&M costs. The latter was higher due to Tg. Bin Power’s (TBP) 58-day SO from 24-Aug to 21-Oct 2019.

• YTD earnings expansion was primarily driven by: (1) improved contribution from TBE as 1Q18 was affected by a forced outage (FO), (2) reduced barging and demurrage costs post-completion of MLK’s coal jetty, and (3) lower finance costs and taxes as detailed above. This more than offset:- 1) reduced contribution from associates mainly emanating from KEV, (2) higher O&M costs, and (3) increased depreciation.

• We expect 4Q19 to be dragged by QoQ normalization of taxes. However, this would be partially offset by: (1) full quarter contribution from Shuaibah’s additional 12% stake, and (2) lower O&M costs from TBP.

Key Takeaways From Results Briefing

• MLK’s JV with Touch Meccanica Sdn Bhd has completed a full feasibility study at one of the potential sites in Sept-19. In the same month, the JV also participated in the e-bidding exercise by Sustainable Energy Development Authority (SEDA) for two small hydro projects. The latter projects, namely Batu Bor (30MW) and Lubuk Paku (25MW) are located at Sg. Pahang. The result of the e-bidding exercise is expected to be announced by SEDA in Dec-19.

• For Phase 3 of Energy Commission’s (EC) Large Scale Solar (LSS3) tenders, management alluded that it is unwilling to match unreasonably low bids submitted by competing players. The latter would likely result in negative project returns - given high costs required for land acquisition and construction of substation and transmission lines. Nevertheless, MLK believes that its bid is one of the most competitive amongst large players.

• Management hinted of possible increase in dividends on the back of chunky sales proceeds from Macarthur’s sale. Given the latter, management is also eyeing potential new assets for capital recycling. Assets on MLK’s radar include Renewable Energy (RE) projects as well as greenfield or brownfield utility assets in ASEAN. Additionally, MLK has also submitted bids for overseas projects, which include 2 water projects (waste water and RO) and one power plant.

Impact

• Maintain earnings forecasts.

Valuation

• We believe that MLK is in aggressive M&A mode, on the back of: (1) soft domestic growth prospects, (2) capital recycling, and (3) emerging opportunities – particularly in the nascent RE segment. The Group has been active on the M&A front lately, as evident from: (1) acquisition of 94% stake in Alam Flora, (2) purchase of an additional 12% stake in Shuaibah Phase 3, and (3) disposal of entire 50% stake in MacArthur. Maintain Buy on MLK with unchanged Sum-of-Parts target price (TP) of RM0.93.

Source: TA Research - 21 Nov 2019