This article first appeared in The Edge Financial Daily on November 27, 2018
Malakoff Corp Bhd
(Nov 26, 86.5 sen)
Maintain buy with a lower target price of RM1.02: Malakoff Corp Bhd reported a higher revenue of RM1.9 billion for the third quarter of financial year 2018 (3QFY18) ended Sept 30, 2018 versus RM1.8 billion for 3QFY17. This was mainly due to a higher energy payment recorded by Tanjung Bin Power Sdn Bhd (TBP) (+11.6% year-on-year [y-o-y]) and Segari Energy Ventures Sdn Bhd (SEV) (+40.8% y-o-y) on the back of a higher applicable coal price, a higher dispatch factor, and an increase in natural gas tariff.
However, this was partially offset by lower energy (-15.5% y-o-y) and capacity payment (-8.2% y-o-y) from Tanjung Bin Energy Sdn Bhd (TBE) due to unplanned plant outages on Sept 9, 2018 following an unexpected boiler wall tube leak and Automatic Voltage Regulator rectification works. TBE resumed operations on Oct 24, 2018. TBE’s unscheduled outage rate (UOR) in 3QFY18 stood at 19%, above the power purchase agreement’s (PPA) threshold of 6%. Nevertheless, we understand that if TBE does not experience any further unplanned outages, it will still be receiving full capacity payments going forward. It expects the UOR to revert to below the 6% level by September 2019.
Malakoff’s revenue for the cumulative first nine months of FY18 (9MFY18) ended Sept 30, 2018 increased 2.3% y-o-y to RM5.46 billion mainly due to higher energy payments from TBP, SEV, and TBE, but were offset by a reduction in capacity payment by SEV from 3QFY17 onwards under the extended PPA.
Its net profit for the quarter increased to RM83.5 million from RM64.2 million in 3QFY17 mainly due to a gain on disposal of investment in Lekir Bulk Terminal in 3QFY18. Meanwhile, 3QFY17 earnings included a one-off settlement received by TBP relating to previous operational issues of RM100 million, but was partially offset by higher income tax expenses due to a one-time tax charge pursuant to the under-provision of prior years’ tax of RM65 million. Excluding that, its core net profit for 3QFY18 declined slightly by 2% y-o-y to RM28.5 million due to a lower contribution from TBE but partially moderated by lower depreciation of c-inspection cost (-8.6%) and operation and maintenance costs (28.1%). We understand that there will be further rectification works for TBE in 1QFY19, but this will be under schedule of planned outages with the cost to be fully borne by GE Steam Power Systems.
Recent proposed acquisition of Alam Flora Sdn Bhd is expected to be completed by end of 1QFY19, pending fulfilment of all the conditions precedent by Jan 31, 2019. Initiatives by the government to push for renewable energy (RE) may benefit Malakoff in the long run as it plans to diversify into waste-to-energy by leveraging on Alam Flora. — PublicInvest Research, Nov 26