We left Malakoff Corporation Bhd’s (MALAKOF) virtual analyst briefing with the following key takeaways: i) Impairment at Al-Hidd IWPP is due to earlier expiry of PWPA than expected; ii) Further impairment at other foreign operations is unlikely; iii) Final dividend to be announced in due course. We trim the share of profit contributed by HPC and hence lower our FY24/FY25/FY26 earnings forecasts by 4.4%/4.5%/4.3% respectively. Maintain Buy with an unchanged target price of RM0.75/share based on sum-of-parts valuation.

Impairment at Al-Hidd IWPP due to earlier Expiry of PWPA than Expected

Recap that the group recognised share of loss at 40%-associate Hidd Power Company (HPC) amounting to RM332.9mn (from impairment of assets) and impairment loss of RM96.1mn in 4QFY23. The reason for the impairment is due to earlier expiry of power and water purchase agreement (PWPA) at Al-Hidd Independent Water and Power Plant (IWPP) than anticipated. The group previously expected extension beyond the PWPA expiry in 2027. Bahrain is currently moving towards more energy efficient method of desalination via reverse osmosis (RO) rather than the thermal desalination technology that AlHidd IWPP utilises. Following the impairment in assets at HPC, the remaining assets (mostly PPE) at HPC will be depreciated using accelerated depreciation method and the profit contribution at the associate will be reduced.

Further Impairment at Other Foreign Operations Unlikely

The only other water desalination plant utilising thermal desalination technology that MALAKOF has stake in is the Shuaibah Phase III IWPP. Nonetheless, impairment due to similar reason as Al-Hidd is unlikely as MALAKOF expects the PWPA to end on expiry and not receive any extension. In short, further impairment in other foreign operations is unlikely at this juncture.

Final Dividend to be Announced in Due Course

According to management, a final dividend will depend on the near-term debt obligation (RM746.3mn debt maturing within 1 year), working capital needs and the capital commitments (expect c.RM300mn capex in FY24). Considering the group’s cash position of RM2.3bn as of 4QFY23 and expectation of better outlook in view of stabilisation in coal prices, we expect MALAKOF to announce 1.5sen to 2.0sen of final dividend next month. Meanwhile, management disclosed that the E-Idaman acquisition is on track to complete by April 2024 and the finalisation of waste-to-energy plant is expected around 2Q to 3QCY24.

Impact

We trim the share of profit contributed by HPC and hence lower our FY24/FY25/FY26 earnings forecasts by 4.4%/4.5%/4.3% respectively.

Valuation

Maintain Buy with an unchanged target price of RM0.75/share based on sumof-parts valuation. The group currently offers an attractive dividend yield of above 7% for FY24-FY26 supported by free cash flow yield of above 20% based on our forecasts.

Source: TA Research - 27 Feb 2024