Prospects remain dim for Malakoff
But valuations appear increasingly attractive after recent fall
MALAKOFF Corp Bhd shares may have rebounded from their lows in recent weeks, but meaningful gains for the counter will likely be capped over the medium term by the company’s lacklustre growth prospects.
As it is, Malakoff has pre-empted the fact that its earnings for the financial year ending Dec 31, 2017, would be hit by lower capacity payment in the revised power purchase agreement between its subsidiary Segari Energy Ventures Sdn Bhd and national utility company Tenaga Nasional Bhd (TNB). The revised PPA has taken effect since July 1 this year.
A quick check on Bloomberg shows the consensus view is that Malakoff, which is Malaysia’s largest independent power producer, could rake in lower earnings for at least two years through the financial year ending Dec 31, 2018.
Malakoff’s shares, which have come under selling pressure since October last year amid poor earnings outlook, dipped to its lowest closing at RM1 on Aug 11.
The counter has since rebounded over the week to close at RM1.10 yesterday. That’s 38.9% below the initial public offer (IPO) price of Malakoff’s shares at RM1.80 when the company was relisted on Bursa Malaysia in May 2015.
Since its reemergence in the local equity market, Malakoff has hardly ever traded above its IPO price. The underperformance of Malakoff contradicts market perception that investors would favour utility stocks for their defensive, or “safe haven”, attributes and regular dividend payouts.
On a positive note, Malakoff’s decline has reached a level that makes its valuations too attractive to be ignored by investors, according to some analysts.
At least eight brokerages have, over the week, upgraded their recommendations on Malakoff’s shares to “buy” - but with half of them ascribing lower target prices for the counter, while the other half maintaining their target prices for the stock.
The median 12-month target price of RM1.24 for Malakoff, based on estimates by 18 out of 12 analysts, suggests a potential upside of 13% from the current level.
“There may be a lack of earnings catalysts in the near term, but the valuation for Malakoff looks compelling at current levels, as the counter has declined more than 20% year-to-date ... so we see a good trading buy opportunity in the counter,” an analyst tells StarBizWeek.
“What’s more, the management is maintaining its commitment to a dividend payout of at least 70%, which points to a potential yield of more than 5% for 2017,” he adds.
Malakoff on Tuesday announced it made a net profit of RM103.26mil for the second quarter ended June 30, 2017, which represented a decline of 20.3% from RM129.63mil in the corresponding period last year.
The lower net profit was mainly attributable to a lower capacity payment from the Tanjung Bin Energy power plants due to unscheduled outages during the quarter in review. In addition, the group’s earnings were also dragged by the recognition of an insurance claim on rotor replacement.
For the first half of 2017, Malakoff’s net profit fell 5.4% to RM202.05mil from RM213.73mil in the previous corresponding period, while its revenue rose 22.4% to RM3.51bil from RM2.87bil. The increase in revenue was mainly due to higher applicable coal prices and higher capacity factor registered by Tanjung Bin Energy’s power plant.
Malakoff proposed a first interim dividend of 2.5 sen per share.
In commenting on Malakoff’s prospects following the release of the group’s second-quarter results, TA Research says it has now turned more positive on the company now that earlier concerns of capacity payment loss for Tanjung Bin Energy have been allayed, noting that operations at the power plant have stabilised after rectification works in May caused unplanned outage for eight days.
“We view this as a re-rating catalyst as it enables Tanjung Bin Energy to start on a clean slate in the second half of 2017.
“Furthermore, we believe that lower capacity payment from Segari and older gas plants have been factored into consensus’ estimates,” TA Research pointed out in its recent note.
The brokerage argues that the rick-reward ratio of the counter appears attractive at this juncture, as the stock price has fallen by about 14% over the last three months.
“In comparison to regional peers, Malakoff trades at 6.3 times its estimated EV/Ebitda (enterprise value/earnings before interest, tax, depreciation and amortisation) for 2018, which implies a 34% discount versus the average of 9.5 times,” TA Research says.
Better outlook
Meanwhile, Maybank Investment Bank Research, which also points out that the risk-reward of investing in Malakoff has turned favourable, says it sees no incremental negatives for the independent power producer in the horizon.
Similarly, RHB Research Institute the nega- tives faced by Malakoff have mostly been priced already by the market.
“We believe the market has taken into account the lower capacity payment from Tanjung Bin Energy due to its unscheduled outages in the first half of 2017.
“We believe the risk of unscheduled outages at Tanjung Bin Energy has been reduced, as the plant is not expected to undergo any turnaround in the second half of 2017,” RHB Research Institute says, adding that Malakoff is starting to look attractive again with an expected dividend yield of 5.6% this year.
Meanwhile, it is noted that Malakoff’s 90%-owned Tanjung Bin Power Sdn Bhd has experienced several operational issues since beginning its commercial operation in March 2016.
But a relief has come in the form of an agreement early this month between Tanjung Bin Power and a consortium of three companies and three other Japanese boiler manufacturers to resolve a long-standing dispute related to the operations of its power plant.
The disputes between the parties were the 22 boiler tube failure incidents at the power station consisting of three 700 megawatts coal-fired units owned and operated by Tanjung Bin Power, and the inability of the plant to meet certain required output conditions.
It was seeking RM780mil in December 2015.
Malakoff now says that the parties have agreed to resolve and settle the disputes in accordance with the terms and conditions of the agreement. This, in turn, would translate into a settlement payment to Tanjung Bin, which would contribute positively to the earnings and net assets of Malakoff for 2017.
The settlement payment, according to Affin Hwang Capital, could be realised as an exceptional gain, which could in turn, be used for a higher dividend payout.
Still, there are some brokerages that remain unenthusiastic about Malakoff.
AmInvestment Research, for one, says while valuations appear increasingly attractive, growth prospects of the company remain opaque due in part to execution risks.In addition, it says, dividend yields of the counter no longer prove as attractive, following the downward revision of its earnings estimates for Malakoff.
Similarly, CIMB Research says it continues to see downside risk to Malakoff’s earnings due to potentially lower energy payments from Tanjung Bin Energy and if there is a decline in the utilisation rate of Tanjung Bin Power.
Both AmInvestment Research and CIMB Research prefer TNB for exposure in the local power sector.
Malakoff’s Tanjung Bin Energy operates a 1,000MW coal-fired power plant which is adjacent to Tanjung Bin Power’s 2,100MW coal-fired power plant in Johor. Malakoff is 37.5%-owned by MMC Corp. Its other substantial shareholders are the Employees Provident Fund, with a 12% stake, while Lembaga Tabung Haji owns 10.2% and Kumpulan Wang Persaraan (Diperbadankan) has an 8% stake.
The bulk of Malakoff’s business is in Malaysia, where it has a capacity to generate from burning gas, oil and coal about 6,346 megawatts (MW) of electricity.
Overseas, it has a capacity to produce 690MW of electricity and a desalination capacity of 444,800 cubic metres per day of water from assets in Australia, Saudi Arabia, Bahrain, Oman and Algeria.