Malakoff Corp
(May 18, RM1.80) 
Maintain outperform with a target price of RM2.18: The performance of Malakoff shares was lukewarm last Friday due to heavy selling pressure, which is contrary to our expectations. Management issued a press statement last Friday evening denying that the group is keen to acquire the power assets of Edra Global Energy Bhd. 

We believe the knee-jerk reaction is temporary, and we continue to like Malakoff based on its independent power producer (IPP) business model which provides the group with consistent and sustainable revenue streams throughout the power purchase agreement (PPA) concession period with fuel cost pass-through features. 

We therefore reiterate our “outperform” call on Malakoff with a target price (TP) of RM2.18. The current weakness in Malakoff’s share price provides an opportunity for investors to accumulate. We expect earnings growth will come from its upcoming 1,000mw coal-fired Tanjung Bin Energy (TBE) power plant, which is scheduled to commence operations on March 1, 2016. 

Despite earlier hiccups in the construction progress, the issues have been resolved. In addition to the chief executive officer Datuk Seri Syed Faisal Albar’s assurance during the initial public offering analysts’ briefing in April, our recent check with management confirmed that TBE’s progress is on track to commence operations as scheduled.

We estimate revenue from TBE to boost the group’s earnings by 46.6% in the financial year ending December 2016 (FY16) and 29% in FY17. 

Arising from the expectation of higher earnings in FY16 and FY17, dividend yields are correspondingly anticipated to be higher, premised on the group’s dividend policy of a minimum 70% of profit after tax and minority interest payout ratio. We estimate dividend yield will be 4.6% for FY16 and 5.9% for FY17. 

According to news reports, the Energy Commission is considering extending the concessions of some existing power plants which are expiring in the next few years due to potential startup delays of awarded power plant projects.  We opine the group’s Port Dickson power plant stands a good chance to be considered for an extension of its PPA. In addition to the plant’s good condition, its close proximity to the central region would be an added benefit for consideration of the extension. 

The group is also believed to be a front runner in a waste-to-energy project for Kuala Lumpur at 1,000 tonnes per day and 25mw capacity. 

Though contribution to the bottom line from this project is expected to be relatively small, it would nevertheless provide an advantage to the group to further explore other waste-to-energy project opportunities and expand its renewable energy portfolio domestically and internationally. 

We anticipate the group will announce stronger first-quarter FY15 results compared with the previous corresponding quarter as the recovery programme for its Tanjung Bin power plant was completed in March 2014.  We continue to like Malakoff based on its IPP business model and reiterate our “outperform” call  with a TP of RM2.18. — Public Investment Bank Bhd, May 18.

This article first appeared in The Edge Financial Daily, on May 19, 2015.