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Thursday, May 21, 2020

Malakoff Corporation - Better Prospect; Upgrade to OP

1QFY20 net profit of RM89.2m beat expectations with maiden earnings from newly acquired assets coupled with the absence of KEV losses. With the zero asset value of KEV no longer in earnings equation, forward earnings volatility is fairly low. Thus, we are now positive on MALAKOF and raise the stock to OP with a revised TP of RM1.02. In addition, it also offers an attractive yield of >6%.
1QFY20 beat expectations. At 35%/32% of house/street’s full-year estimates, 1QFY20 net profit of RM89.2m came above our expectation as we have not adjusted for: (i) maiden earnings from Alam Flora and enhanced share of profit from an additional 12% stake in Shuaibah, and (ii) the absence of KEV’s losses after it was written down to zero value in 4QFY19. There was no dividend declared in the quarter as it usually pays half-yearly dividend in 2Q and 4Q every year.
New assets to lead earnings growth. 1QFY20 earnings surged strongly QoQ to RM89.2m from RM25.8m in the preceding quarter, despite revenue growth of only 3%, largely due to the absence of KEV’s losses after the associate asset was written down by RM433.3m to zero value in 4QFY19 with a share of loss at associate level of RM88.0m posted then. In addition, share of profit of associate income at Shuaibah more than doubled up to RM24.8m from RM11.0m as MALAKOF’s stake was doubled. There was also maiden earnings contribution from the newly acquired Alam Flora with net profit of RM15m. However, earnings were partly mitigated by IPPs’ capacity payments which fell by 4% to RM522.0m from RM546.1m.
… as well as the absence of KEV losses. Similarly, 1QFY20 earnings jumped 33% YoY from RM67.0m a year ago, despite revenue falling 12% which was largely due to the fall in energy payment by 27%. The improved results were attributable to the said Alam Flora and 12% additional stake in Shuaibah while KEV recorded RM7.1m losses previously. On the other hand, capacity payment was higher slightly by 1% or RM4.2m as GB3 posted capacity payment which rose by RM16.6m.
Earnings looking better. With the kitchen sinking exercise on KEV in 4QFY19, forward earnings are expected to be stable in the absence of KEV losses. Meanwhile, the current Movement Control Order (MCO)- led slowdown should have immaterial impact on MALAKOF as it is an essential service provider. Furthermore, IPP capacity payments are covered under PPAs. Post-results, we upgraded FY20E CNP by 31% to account for: (i) the inclusion of Alam Flora; (ii) 12% additional stake in Shuaibah, and (iii) the absence of KEV losses. FY20E NDPS is also upped proportionally based on unchanged 80% pay-out. We also introduced FY21 forecasts with earnings set to grow by 6%.
Upgrade to OUTPERFORM. Given the depressed market condition, we continue to value MALAKOF based on PBV but at one notch higher to 4-year mean of 0.93x from -1SD 4-year PBV mean of 0.71x (having switched from the SoP valuation in our Utilities Sector Report: Keep It Flowing dated 02 Apr). The targeted mean valuation is on the back of earnings certainty which has improved in the absence of KEV. With this, our new TP is RM1.02 from RM0.78 previously. The stock is now an OP from MP for its undemanding valuation post KEV’s losses coupled with above average yield of >6%. Risk to our recommendation is unplanned outages which would lead to lower- than-expected earnings.
Source: Kenanga Research - 21 May 2020

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