Macarthur, Alam Flora transactions likely to address Malakoff’s gearing

This article first appeared in The Edge Financial Daily, on February 7, 2020.
Macarthur, Alam Flora transactions likely to address Malakoff’s gearing
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Malakoff Corp Bhd
(Feb 6, 84.5 sen)
Maintain buy with an unchanged target price (TP) of RM1:
With the completion of the Alam Flora and Macarthur transactions, we expect net gearing to fall to a palatable around one time in end-2019. An affirmation would thus alleviate prevailing balance sheet concerns, possibly triggering a rerating of the stock in our view.

Malakoff Corp Bhd remains one of our conviction dividend-yield picks in Malaysia.

The disposal of Malakoff’s 50% stake in the Macarthur Wind Farm for A$345 million (RM958.82 million) would net Malakoff a disposal gain of around RM500 million.

With the shedding of Macarthur’s balance sheet (Macarthur’s financials were proportionately consolidated), we estimate a reduction in Malakoff’s net debt by around RM2.4 billion, thus bringing net gearing to a palatable around one times at end-2019.

Meanwhile, the acquisition of Alam Flora is not particularly significant to gearing, with Alam Flora being in  around RM500 million net-cash position at March 2019.

Daily operational logs released by the regulator indicate that Tanjung Bin Energy was operating normally in the fourth quarter ended Dec 31, 2019 (4Q19). There were also no surprises at Tanjung Bin Power (TBP), with all three units having resumed generation at end-October 2019 (recall TBP underwent major maintenance from August 2019 to October 2019). Malakoff to report financial year ended Dec 31, 2019 (FY19) results on Feb 19.

Our FY19/FY20/FY21 earnings are revised by -1%/+15%/+13% respectively as we incorporate the Alam Flora and Macarthur transactions.

Our RM1 TP (based on a sum-of-parts with each entity valued on a discounted cash flow) is unchanged as we incorporated latest transactions and raise our weighted average cost of capital assumption to 7.5% (from 7.3% to reflect heightened ESG [environmental, social and governance] concerns).

We continue to expect management to maintain a 100% dividend payout ratio going forward, while noting there is room for FY19 dividend per share to surprise positively. — Maybank IB Research, Feb 5