Malakoff Corp Bhd
(July 7, RM1.79)
Initiate with hold with a target price (TP) of RM1.92: We initiate coverage on Malakoff, the largest independent power producer in Malaysia with a “hold” rating and a discounted cash flow-based TP of RM1.92.

While we forecast a 2014 to 2017 earnings compound annual growth rate of 17%, we believe these positives are already priced in. Nonetheless, we see Malakoff as a decent dividend yield play with management guidance of at least 70% dividend payout.

Malakoff exhibits stable and defensive earnings as its power generation capacity is fully contracted for, based on long-term power purchase agreements that feature fuel cost pass-through and scheduled escalations in relation to operating rates.

The management intends to grow Malakoff’s total effective power generation capacity from 7,036mw in 2016 to 10,000mw by 2020.

However, most of the plant-ups for Peninsular Malaysia have already been awarded by the Energy Commission and thus may present a challenge to Malakoff’s medium-term growth plans.

With a healthier balance sheet now, Malakoff is better positioned to undertake new power projects and pursue mergers and acquisitions to grow. — Affin Hwang Capital, July 7

This article first appeared in The Edge Financial Daily, on July 8, 2015.