This article first appeared in The Edge Financial Daily on October 31, 2019

Malakoff Corp Bhd
(Oct 30, 85.5 sen)
Maintain buy with an unchanged target price (TP) of RM1: The proposed disposal of the entire 50% participating interest in the Macarthur Wind Farm in Australia values the equity at 2.6 times our discounted cash flow-based valuation and is thus significantly accretive (an additional eight sen per share). The resulting Macarthur earnings contribution loss would likely be offset by higher net interest income stemming from the cash proceeds. We reiterate our “buy” call with an unchanged TP of RM1 pending completion of the deal. Malakoff Corp Bhd is one of our top 10 dividend yield picks in Malaysia.

Malakoff has proposed to dispose of the 50% stake to infrastructure fund AMP Capital for A$356.85 million (RM1.03 billion) cash, representing 15.7 times its financial year 2018 (FY18) earnings. With Malakoff’s original acquisition cost at only A$130 million in 2013, the transaction would result in a sizeable disposal gain upon completion (Malakoff estimates it to be RM546 million). The deal is still pending fulfilment of certain conditions, with the long stop date being tentatively set as Feb 12, 2020.

Malakoff’s 2013 Macarthur acquisition was entirely debt-financed, so part of the disposal proceeds would be earmarked for debt repayment (about A$140 million). Assuming deal completion at end-2019, we estimate Malakoff’s FY19 net debt to be lowered by about RM2.45 billion, bringing its net gearing to a more palatable about one times.

Our earnings forecasts and sum-of-the-parts-based TP are unchanged pending deal completion. It is unclear presently whether the potential disposal gain would be included for the purpose of dividend calculation. In any case, a 100% payout of core earnings already implies a dividend yield of over 7%. — Maybank IB Research, Oct 30