This article first appeared in The Edge Financial Daily on May 25, 2018

Malakoff Corp Bhd
May 24 (87 sen)
Maintain buy with a lower target price (TP) of RM1.09: Malakoff Corp Bhd reported a decline in net profit by 46% year-on-year (y-o-y) to RM52.9 million in the first quarter ended March 31, 2018 (1QFY18), accounting for 23% and 19% of our and consensus full-year estimates respectively. The results were in line with ours but below consensus estimate.

The decline in net profit was mainly due to lower contribution from Segari Energy Ventures Sdn Bhd (SEV) following the reduction in tariff under the extended power purchase agreement (PPA) as well as lower fuel margin recorded at Tanjung Bin Power (TBP) and Tanjung Bin Energy (TBE).

There was no dividend declared for the period under review.

We maintain our “trading buy” call on Malakoff but at a lower TP of RM1.09 (previously RM1.29) based on discounted cash flow valuation as we increase our risk premium estimates due to constant delays in hitting full efficiency in TBE. Malakoff is currently trading at financial year ending Dec 31, 2019 (FY19) enterprise value to earnings before interest, taxes, depreciation and amortisation of eight times compared with its peers at 11 times.

The lower revenue was due to lower capacity payment from SEV. Capacity payment for 1QFY18 declined by 26% y-o-y mainly due to lower capacity payment from SEV (-82.2% y-o-y) following the reduction in tariff under the extended PPA effective from July 2017.

Meanwhile, TBE (-17.2% y-o-y) had been affected by rectification works on the boiler and electrical system during the period. The rectification works are completed and the plant returned to commercial operation on Feb 22, 2018. The impact on the forced outage rate and the reduction in the capacity payment was however mitigated partly by rescheduling of some of the planned outages.

We understand that the planned outages allowed under the PPA for the five-year contract-year block (FY16-FY20) is 9% annually, which translates into 157 days over the five years. As at Dec 31, 2017, TBE has utilised 110 days, exceeding its budget of 68 days.

Nevertheless, TBE had made the provision of availability target penalty (ATP) of RM84 million in 4Q last year, of which the actual payment to Tenaga Nasional Bhd will only be payable in the year 2021 if the accumulation days exceed the 157 days. Going forward, the management is expecting minimal interruption in TBE, hence received normalised capacity payment from 2QFY18 onwards.

Net profit in 1QFY18 dropped 46.4% y-o-y mainly due to lower contribution from SEV following the reduction in tariff under the extended PPA as well as lower fuel margin recorded at TBP and TBE. However, this was cushioned by a declined in cost of sales (-4.2% y-o-y) to RM1.25 billion owing to lower SEV amortisation of intangibles (-42.7% y-o-y), operation and maintenance cost (-27.4% y-o-y) and depreciation cost (-10.5% y-o-y). In addition, the group reported lower finance cost (-14.6% y-o-y) due to the settlement of the Junior EBL in 4QFY17.

Income from the associates declined to RM15.6 million in 1QFY18 compared with RM32.7 million in 1QFY17, attributable to a one-off adjustment for changes in the treatment of tax (2010-2016) in Shuaibah (Saudi Arabia).

Malakoff guided that the dividend payout of at least 100% is probable going forward, with its total cash as at the end of 1QFY18 standing at RM4.9 billion. At the current price, we estimate a dividend yield of about 5% and 6% in FY18 forecast (FY18F) and FY19F. — PublicInvest Research, May 24