Malakoff Corp Bhd
(June 24, RM1.79)
Initiate coverage with an outperform rating and a target price (TP) of RM2.10: Malakoff is the biggest independent power producer (IPP) in Asean with approximately 6,036mw of operational capacity and another 1,000mw under construction. Fears over 1Malaysia Development Bhd (1MDB), the potential industry restructuring, the ringgit, and foreign outflow of capital seem overblown to us.

Any huge acquisition of assets would need shareholders’ approval. Despite increasing competition squeezing returns in the long run, the scope for growth is clear, particularly in the light of declining reserve margins.

The conclusion of the 1MDB saga would also be a positive catalyst, removing a source of fear. Risks to our call include high unplanned outage rates, rising interest rates, and acts of war/terrorism affecting Malakoff’s Middle East and North African assets.

Most Asean peers offer a yield of 3% to 4%. We impute a 10% discount to our discounted cash flow valuation, based on definite prospects, to arrive at our TP to ensure a decent margin of safety. — Credit Suisse, June 23

This article first appeared in The Edge Financial Daily, on June 25, 2015.