• Keep BUY and MYR0.86 TP, 28% upside with c.8% FY23F yield. We are positive on the potential development of three hydropower plants in Kelantan with a combined installed capacity of 84MW, as this would increase Malakoff Corp’s net renewable portfolio to c.100MW – in line with its long-term target of 1,400MW by 2031. Our preliminary assessment suggests an average PATAMI of MYR30-35m pa impact and values the project at MYR0.02/share.

• To develop three hydroelectric assets. Malakoff has entered into a heads of agreement (HOAs) with Rising Promenade (RPSB), RP Hydro (Kelantan) (RPHK), and Rising O&M Engineering Services (ROMES) to develop, own, operate, and maintain three hydroelectric renewable energy (RE) plants in Kuala Krai, Kelantan. These three small hydropower plants or SHPs – Kemubu (29MW), Kuala Geris (25MW), and Serasa SHP (30MW) – have a combined installed capacity of 84MW. Following the series of HOAs, which are expected to be completed within the next three months, Malakoff will have 70% of the ordinary shares in RPHK and operations & maintenance company ROMES. It will also progressively inject MYR250m into RPHK for preference shares.

• Capex estimated at >MYR1.2bn. RPHK was awarded these projects in Jul 2018 by the Kelantan State Government. Three separate RE power purchase agreements or REPPAs have been signed with Tenaga Nasional (TNB MK, NEUTRAL, TP: MYR10.20) in Jun 2021 for 21 years. Target commercial operation date or COD is scheduled for mid-Dec 2025. We are guided that total capex required is estimated at MYR1.23bn, which is c.MYR14.6m/MW. This appears to be on the higher side, which could possibly due to various reasons, ie design, technology, location, access to the national grid, etc. While the tariffs are not disclosed, we are also guided that project IRR is estimated at high single-digits while tariffs are comparable with other hydro projects. These RE facilities will be funded on a finance-to-equity structure of 80:20, whereby the ASEAN Green SRI Sukuk Wakalah will be issued.

• BUY. Pending further details, we maintain our earnings estimates on Malakoff. Based on our preliminary calculation, these assets could add average PATAMI of MYR30-35m pa (9-10% of our FY23F earnings) and potentially be valued at MYR0.02/share. These are based on MYR1.2bn in capex, a 70% equity stake, 80:20 debt equity ratio, and 7% WACC. Our DCF-based TP is kept at MYR0.86 with the incorporation of a 6% discount applied, which is based on our ESG score of 2.7.

• Downside risks: Higher-than-expected plant outages and opex.

Source: RHB Research - 22 Mar 2023