This article first appeared in The Edge Financial Daily on February 4, 2020

Malakoff Corp Bhd
(Feb 3, 82 sen)
Maintain buy with an unchanged fair value (FV) of RM1: Our FV of RM1 per share for Malakoff Corp Bhd implies a financial year 2020 forecast (FY20F) price-earnings ratio (PER) of 19.1 times. Malakoff is currently trading at an FY20F PER of 15.7 times and FY21F PER of 15.1 times.

We raise Malakoff’s net profit for FY20F by 4.3% to account for Alam Flora Sdn Bhd’s contribution and a higher interest income from the disposal of the Macarthur Wind Farm. These two would more than compensate for a loss of earnings from the disposal of the Macarthur Wind Farm in December 2019.

Alam Flora is estimated to account for 10% of Malakoff’s revenue and 9% of earnings before interest and tax for FY20. Also currently, coal power plants make up 48.9% of Malakoff’s effective generation capacity, while gas — including multi-fuel units at the Kapar power plant — comprises another 51.1%.

There is space for higher dividends for FY20 although we do not expect Malakoff to return all RM988 million of proceeds from the disposal of the Macarthur Wind Farm to shareholders.

Assuming 10% of the RM988 million or RM98.8 million is used to pay dividends, this would translate into an additional 1.9 sen per share. We reckon the remaining proceeds from the disposal would be for repaying borrowings, resulting in a lower interest expense in future. Malakoff’s gross borrowings stood at RM13.9 billion as at end-September 2019, inclusive of a perpetual sukuk of RM800 million.

We have yet to factor in higher dividend payments from Malakoff. Currently, we forecast a gross dividend per share of five sen for FY20, translating into a yield of 6.1%.

We expect the Tanjung Bin Energy (TBE) power plant’s capacity and energy payments to sustain in FY20. TBE has stabilised after a 73-day shutdown in the second quarter of financial year 2019 (2QFY19) for maintenance and rectification works. We understand the unplanned outage rate (UOR) at TBE has fallen below 3% compared with a peak of 13%. The threshold UOR stipulated in the power purchase agreement with Tenaga Nasional Bhd is 6%. TBE accounted for 29.2% of Malakoff’s capacity payments in the nine months of FY19.

We believe Malakoff would still seek opportunities in the renewable energy (RE) sector. So far, the group’s exposure to RE has been via its 55-megawatt (MW) hydropower plants in Pahang, awarded in December 2019 and an operation and maintenance contract for the 29MW solar power plant in Kota Tinggi, Johor. — AmInvestment Bank, Feb 3