With the ongoing search for some development in business, RHB Research Institute is maintaining a Buy call to Malakoff, an independent power producer (IPP), with a new discounted cashflow target price of RM1.09 compared to RM1.05 above. It said Malakoff was perceived on Thursday as providing thrilling earnings development and FY20F yield of c.6 per cent.
The results of Malakoff’s 1Q20 beat expectations because of a stronger contribution from JV & associates. Post-adjustments, we still expect earnings to rise 11%-33% in FY20F-21F, backed by Alam Flora ‘s enhanced plant efficiency and steady contributions while paving the way for longer-term renewable energy projects.
RHB Research stated that 1Q20 core earnings of RM97mil (+2.3 times QoQ, +45 percent YoY) beat forecasts on higher than anticipated contributions from JV & associates at 38 percent and 35 percent of its full-year and consensus projections. It said the core earnings of 1Q20 increased by 2.3 times to RM97mil thanks to higher contributions from the Tanjung Bin Energy Plant (TBE) and Tanjung Bin Power Plant (TBP), and the absence of a share of losses from Kapar Energy Ventures (KEV) completely given in 4Q19.
YoY, core income also increased by 45 per cent of YoY on higher contributions from JV & associates (Shuaibah, Hidd Power Co, and absence of KEV losses) and Alam Flora ‘s complete quarter contribution.
This is offset by the lack of contribution from Macarthur Wind Farm after its disposal at the end of last year. RHB Research has confirmed that all the Malakoff plants are still in service during the Movement Management Order period. Which leaves the balance of the power fees unchanged. Lower energy charges on the lower capacity factor are anticipated, but the effect on earnings is very small, since it is meant to cover variable running costs and fuel costs.
As part of the government’s efforts to control the spread of COVID19, Malakoff ‘s subsidiary Alam Flora has been involved in sanitation and disinfection services across Kuala Lumpur , Putrajaya and Pahang, in addition to the solid waste management operations. We do believe, however, that the impact on earnings is rather minimal.
Meanwhile, management is seeking to finalize the Power Purchase Agreements (PPA) and achieve this year’s financial closure for its 55MW mini hydro projects. They like to increase earnings for the FY20F-22F by 3-14 percent after attributing a higher contribution from its JV & associates. After changing the earnings, our DCF generated TP from RM1.05 is modified to RM1.09.
Further growth can be achieved if Malakoff, through its collaboration with JPower, one of Japan’s largest power companies, can secure any international greenfield or brownfield power generation or water projects.
For them, the main threats to their calls: unplanned outages, fuel supply interruption and higher operational costs than anticipated.