This article first appeared in The Edge Financial Daily on February 23, 2018

Malakoff Corp Bhd
(Feb 22, 92.5 sen)
Maintain buy with a target price (TP) of RM1.05: Malakoff Corp Bhd’s financial year 2017 (FY17) core profit was below our expectations due to unplanned outages at the Tanjung Bin Energy Sdn Bhd (TBE) plant due to boiler failure, and impact from Segari power purchase agreement (PPA) revision. While overall core profit was weaker in FY17, the nominal value of dividend was maintained at six sen per share in total, implying a higher payout ratio. We believe TBE hiccups would be solved in the first quarter of 2018 (1Q18), which indicates normalisation of earnings in the second quarter of FY18 (2QFY18).

After reducing our FY18 to FY19 earnings, our sum-of-parts TP is cut to RM1.05 (from RM1.20). We reiterate “buy”, despite a weak earnings outlook, due to attractive prospective dividend yields.

4QFY17 core net profit came in at RM50.8 million, bringing FY17 earnings to RM319 million, below our expectations at 81% of our forecast but within the consensus. The main reasons for the negative surprise are the larger-than-expected negative impact from the Segari PPA (starting July 2017) and unplanned outages at TBE in 4Q17, resulting in lower capacity payments. Overall, FY17 core net profit declined 15% year-on-year (y-o-y) mainly due to: Lower capacity payments from the Segari PPA — upon revision of the PPA in July 2017; and unplanned outages at TBE (resulting in about RM50 million decrease in capacity payment).

A second interim dividend of four sen per share was declared, bringing its full-year dividend to six sen per share (implied yield of 6.8%). This implies a dividend payout ratio of 97.2%, significantly higher than its historical payout of 60% to 75%. Management indicated during its briefing that the group would pursue a higher dividend payout policy (more than 90%) to provide more value to shareholders.

All the other major PPAs are still intact, and we expect capacity payments to be flattish y-o-y, and similar revenue levels in 2018 (other than Segari, whose PPA was revised lower).

We reduce our FY18 to FY19 earnings forecasts by 43% and 31% respectively, to account for lower capacity payments from Segari and conservatively pricing in two outages at TBE in FY18. Our dividend payout assumption has risen to 90% (from 60%), leading to yields of 5.2% and 5.9% for FY18 and FY19 respectively.

Our TP has correspondingly dropped to RM1.05 (from RM1.20). We still like the stock due to its attractive dividend yield level, its low valuation after major share price correction on the TBE outage and Segari PPA revision, and the recurring cash flow from its PPAs. We maintain our “buy” call. Key risks to our call would be any further outages at TBE and higher losses from its joint ventures. — RHB Research, Feb 22