This article first appeared in The Edge Financial Daily on February 11, 2019

Malakoff Corp Bhd
(Feb 8, 84.5 sen)
Maintain hold with an unchanged fair value of 85 sen: Maintain hold on Malakoff Corp Bhd (Malakoff) with an unchanged discounted cash flow-based fair value of 85 sen a share (terminal growth rate: 7.6%). Our fair value of 85 sen a share implies a forecast financial year for 2019 (FY19F) price to earnings ratio (PE) of 21.2 times and FY20F PE of 20.7 times.

We have assumed Malakoff’s gross dividend per share (DPS) to be 3.5 sen for FY18E and 4.0 sen for FY19F. These translate into decent dividend yields of 4.2% for FY18E and 4.8% for FY19F. Implied net dividend payouts are 93% for FY18E and 100% for FY19F.

We will be upgrading Malakoff’s FY19F earnings forecast if the RM944.6 milllion acquisition of 97.4% of Alam Flora is completed by 3QFY19. Recently, Malakoff announced that the cut-off date for the fulfilment of the conditions for the acquisition has been extended to 31 July 2019.

Alam Flora is estimated to improve Malakoff’s FY19F net profit by 4% based on an earnings contribution of five months. On a full year basis, Alam Flora would increase Malakoff’s FY20F net profit by 10%. Alam Flora would also boost Malakoff’s fair value from 85 sen a share to about 94 sen a share. The government is reviewing Alam Flora’s fee structure currently.

Going forward, Malakoff has scheduled 100 days of maintenance shutdowns for the Tanjung Bin Energy (TBE) power plant in FY19F. As these are scheduled outages, Malakoff will still receive capacity payments from Tenaga Nasional in FY19F.

We gather that there has not been any unplanned outage at the power plants in 4QFY18. However, TBE power plant’s earnings may still be slightly affected as the rectification works for the voltage regulator, which started in early September, was only completed at the end of October 2018. Recall that there were unplanned outages at the TBE power plant, GB3 power plant and KEV power plant in 3QFY18

Malakoff is negotiating with General Electric, which is the main contractor, on the compensation for the unplanned outages at the TBE power plant. The compensation would not be able to make up for the loss in capacity payments. However, Malakoff is hoping to extend the warranty period for the equipment and parts and/or receive compensation to cover the cost of repair or rectification works.

Previously, Malakoff’s target was to achieve the stipulated PPA threshold unplanned outage level of 6% by February 2019. Due to the numerous unplanned outages in 3QFY18, the timeline has been shifted to September 2019. Malakoff’s unplanned outage rate was unchanged at 13% in September 2018 compared with 1HFY18. — AmInvestment Bank, Feb 8