Malakoff Corporation Bhd has proposed to acquire 49% equity interest in solid waste management solutions provider E-Idaman Sdn Bhd for RM133.2mn. We are neutral on MALAKOF’s proposed acquisition despite its slightly high price. We expect the acquisition to be immediately earnings accretive and provides earnings growth opportunity for the group in the northern region of Malaysia. We take this opportunity to make some housekeeping adjustments, adjusting our FY23/FY24/FY25 earnings forecasts to -331.3mn/RM301.1mn/RM319.8mn respectively. Our earnings forecasts have yet to account for the acquisition of E-Idaman. Our estimate shows that E-Idaman will contribute additional 3.4%-3.7% to MALAKOF’s FY23-FY25 EPS. Maintain Buy with an unchanged TP of RM0.67/share based on sum-of-parts valuation.

Details of the Offer

On 27 October 2023, Malakoff Corporation Bhd (MALAKOF) has proposed to acquire 49% equity interest in E-Idaman Sdn Bhd for RM133.2mn. The deal is targeted to be completed by April 2024, within 6 months of the proposal.

E-Idaman is principally involved in project management, consultancy, and contracting services in the field of solid waste management. E-Idaman’s wholly owned subsidiary Environment Idaman Sdn Bhd provides solid waste collection and public cleansing management services for the State of Kedah and Perlis under a 22-year concession. The concession starts on 19 September 2011 and has expired in September 2023.

Management believes that the acquisition will provide MALAKOF with the opportunity to expand its geographical footprint in waste management to the northern region. Additionally, the move is a continuation of MALAKOF’s transformation with portfolio diversification that integrates environmental services to achieve zero waste circular economy.

No details of the financing structure were disclosed. However, we expect most if not all the acquisition to be completed via internally generated funds. The group currently has cash position of RM1.4bn as of 2QFY23. Assuming that the acquisition is completed fully via internally generated funds, this is expected to raise the group’s FY23E net gearing (inclusive of perpetual sukuk) from 1.23x to 1.25x.

Our Take

We are neutral on MALAKOF’s proposed inorganic expansion in the waste management business despite its slightly high price. We expect the acquisition to be immediately earnings accretive and provides earnings growth opportunity for the group in the northern region of Malaysia.

Based on FY22 earnings of RM27.7mn, the acquisition translates into trailing P/E of 9.8x (MALAKOF FY22 P/E: 9.7x). As a comparison, MALAKOF’s acquisition of 97.37% stake in Alam Flora Sdn Bhd at the final price of RM869mn translates into trailing P/E of 8.7x. We believe the acquisition of E-Idaman is on the high side considering that (i) the acquisition does not provide controlling stake for MALAKOF and (ii) the 22-year concession for waste management in Kedah and Perlis has already expired last month. On the other hand, Alam Flora’s acquisition provides controlling stake and has few more years of concession.

E-Idaman’s acquisition is expected to be immediately earnings accretive. Assuming that the E-Idaman obtains extension in concession agreement for the waste management in Kedah and Perlis, our estimate shows that E-Idaman will contribute additional 3.4%-3.7% to MALAKOF’s FY23-FY25 EPS

Impact

We take this opportunity to make some housekeeping adjustments, adjusting our FY23/FY24/FY25 earnings forecasts to -331.3mn/ RM301.1mn/ RM319.8mn respectively. Our earnings forecasts have yet to account for the acquisition of EIdaman. Our estimate shows that E-Idaman will contribute additional 3.4%-3.7% to MALAKOF’s FY23-FY25 EPS.

Valuation

Maintain Buy with an unchanged TP of RM0.67/share based on sum-of-parts valuation.

Source: TA Research - 30 Oct 2023