This article first appeared in The Edge Financial Daily on August 8, 2017

Malakoff Corp Bhd
(Aug 7, RM1.04)
Maintain neutral call and a target price (TP) of RM1.29: Malakoff Corp Bhd announced that its 90%-owned unit, Tanjung Bin Power Sdn Bhd, had entered into an agreement with IHI Corp Japan, ISHI Power Sdn Bhd, IHI Power Systems (M) Sdn Bhd (IPSM), Sumitomo Corp, Zelan Holdings (M) Sdn Bhd and Sumi-Power Malaysia Sdn Bhd to resolve and settle the disputes related to the previous operational issues at the Tanjung Bin Power Plant, according to the terms and condition of the agreement.

Although it did not disclose the terms and conditions, and the amount to be settled, we are positive on this new development as it should help to improve its financial year 2017 forecast (FY17F) earnings. However, we maintain our “neutral” call and discounted cash flow-based TP of RM1.29. While the potential upside to our TP is still attractive, we believe near-term sentiments may remain weak due to lower-than-expected earnings in the forthcoming second-quarter results owing to recent operational challenges.

To recap, Tanjung Bin Power was seeking damaged claims from a few parties through a litigation action in December 2015 and arbitration proceedings in November 2016. The total claimed amount was estimated at around RM785 million as at November 2016. This was due to 22 different boiler tube failure incidents at the Tanjung Bin Power Plant and the inability of the plant to meet certain required output conditions. IHI is the manufacturer and supplier of the equipment, parts and components of boilers and the boiler system at Tanjung Bin Power. ISHI and IPSM provide services for the boilers and mills at the plant. Meanwhile, Sumitomo, Zelan and Sumi-Power are the EPCC (engineering, procurement, construction and commissioning) contractors of the power plant.

Tanjung Bin Power will: i) enter into a consent judgement in the litigation action on a strictly without admission of liability basis; and ii) withdraw and discontinue the arbitration proceedings, based on the agreed terms and conditions, which are yet to be disclosed.

Although this will be a one-off gain in FY17F, we see this piece of news as positive for Malakoff as this will cushion the earnings pressure from the unexpected lower capacity payment from Tanjung Bin Energy in the second quarter of FY17, as well as lower contribution from Segari Energy Ventures in the second half of FY17. Pending further details of the agreement, we maintain our forecasts for now. — PublicInvest Research, Aug 7