This article first appeared in The Edge Malaysia Weekly on April 23, 2018 - April 29, 2018

INDEPENDENT power producers (IPPs) are supposed to be cash cows with minimum earnings risks that pay generous dividends. They are usually the safe havens in times of uncertainty.

But this is certainly not the case for Malakoff Corp Bhd, whose share price has halved since its initial public offering at RM1.80 per share in 2015. The stock closed at 89.5 sen last Friday, losing some RM3.9 billion in market capitalisation since its relisting on Bursa Malaysia.

It is understood that Malakoff, a 37.7%-owned unit of MMC Corp Bhd — the flagship of tycoon Tan Sri Syed Mokhtar Albukhary — lost its shine mainly because it has not been able to secure new power generation projects. Also, gone are the days when IPPs were awarded sweetheart deals with favourable terms plus high internal rates of return.

Adding to the gloom is that Malakoff has been having operational issues at its power plants.

“Although Malakoff’s IPP business is defensive in nature, the company has been plagued by operational issues such as the two major outages at its Tanjung Bin Energy plant,” says an analyst.

In view of such problems, TA Securities has given the IPP a “sell” rating with a target price of 82 sen. “We prefer to stay on the sidelines until Tanjung Bin Energy’s rolling unscheduled outage rate is comfortably below its allowable first threshold of 6% (currently at 14%), as defined by its PPA, with signs of sustainable smooth operations,” it says in a research note.

“Furthermore, Malakoff lacks major visible earnings catalysts in the near-to-medium term. This is underpinned by limited capacity expansion save for new small renewable energy projects, which are not expected to swing Malakoff’s earnings pendulum meaningfully.”

Malakoff’s earnings took a dip in its financial year ended Dec 31, 2017 (FY2017), partly due to revisions in Segari Energy Ventures Sdn Bhd’s PPA with effect from last July. The PPA extension resulted in a lower capacity payment and, therefore, reduced earnings. Revenue grew 17% to RM7.13 billion on higher energy payments but net profit fell 13% to RM309.95 million as the higher payments from Tanjung Bin Power Sdn Bhd and Tanjung Bin Energy Sdn Bhd were partially offset by lower capacity payments recorded at Segari Energy Ventures’ gas plant.

Malakoff is in a net debt position. It has cash and cash equivalents of RM2.35 billion, against total borrowings of RM15.83 billion.

Frank Lin, a dealer’s representative at Hong Leong Investment Bank Bhd, opines that Malakoff’s gearing is a concern to investors.

“Malakoff is a highly geared company, which may not go down well with investors. When we are approaching a general election, there are risks involved in long-term [government] contracts. They may be reviewed if there is change on the domestic political scene,” he tells The Edge.

“The election factor aside, the company does offer excellent value for investors as PPAs always favour the power producers ... not only are the prices good but also there is a guaranteed take-up rate by Tenaga Nasional Bhd, so it is a safe business.”

To be fair, Malakoff is not the only IPP losing its shine. YTL Power International Bhd, which operates the Paka and Pasir Gudang power stations in Malaysia and the PowerSeraya plant in Singapore, also saw its share price hit a 12-year low of 93.5 sen last Thursday.

In an April 4 note on the utilities sector, Kenanga Research says the weakness in the IPPs’ share prices offers a buying opportunity. “IPPs are backed by PPAs, which guarantee capacity payments as long as the requirements are met. Also, the valuation for the sector is not demanding, at 13.3 times 2018 [expected] earnings, which is below the FBM KLCI’s 15.3 times.”

The research house has an “outperform” call on Malakoff and “market perform” call on YTL Power International with a target price of RM1.25 for both.

Tougher operating landscape

Areca Capital CEO Danny Wong opines that the outlook for the IPP sector does not seem too promising, given that most of the first-generation PPAs are nearing expiry. They will have lower contributions from the PPA extensions.

“Therefore, the outlook may not be as good as before. This may also make it more difficult for IPPs to raise funds via the issuance of debt instruments such as bonds as they may not get the level of subscription as before because the contracts are not as lucrative as they once were,” he says.

“The dividend yields of IPPs may look attractive to investors, given that their share prices have come down. However, the yields of cash cows such as gaming stocks are attractive too, so there are many choices out there.”

Malakoff’s dividend yield is 6.9% while YTL Power International’s is 5.19%.

UOB Kay Hian points out that Malakoff’s strategy to conserve cash for expansion may put more pressure on the IPP.

“Following Malakoff CEO’s recent announcement on conserving the group’s war chest for future expansion, we are projecting a conservative dividend payout of 80%, versus 2016/17’s 100%. This translates into a net dividend yield of 4.6% and 5.2% for 2018 and 2019 respectively,” it says in a Feb 22 note.

Malakoff saw a change in its top management last year after its managing director Datuk Wira Azhar Abdul Hamid and chairman Tan Sri Syed Anwar Jamalullail resigned in June. Azhar was appointed chairman of Felda Global Ventures Holdings Bhd in September.

The boardroom changes did not seem to go down well with the market as Malakoff’s share price plunged to an all-time low of RM1.04 a day after the announcement.

Former Proton Holdings Bhd CEO Datuk Ahmad Fuaad Mohd Kenali was appointed Malakoff CEO while Datuk Hasni Harun was made its chairman.

Some say the group’s new leadership will have to perform a delicate balancing act in attracting investor interest, that is, between acquiring earnings-accretive power assets and paying handsome dividends.

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