Despite the weak earnings, CIMB Research maintained its Hold call on Malakoff.
KUALA LUMPUR: Independent power producer Malakoff Corporation Bhd
’s FY16 core net profit was only at 88% of CIMB Equities Research’s forecast and 79% of Bloomberg consensus due mainly to provision and higher-than-expected tax expenses.
The research house had on Tuesday cut its FY17-18F EPS by 12%-27% to reflect higher operating expenses and interest cost. This lowers its sum-of-parts based target price from RM1.41 to RM1.22.
“Maintain Hold as we believe the weak earnings prospects have been priced in. We prefer Tenaga Nasional for exposure to Malaysian utilities,” it said.
CIMB Research said excluding net foreign exchange gain of RM1.2mil, Malakoff’s 4Q16 core net profit fell 20% on-year to RM89mil, due mainly to higher depreciation and amortization charges.
It pointed out Malakoff changed its depreciation policy in 3Q16, lowering the residual values of its power plants. This resulted in higher annual depreciation charges.
“Malakoff’s FY16 core net profit was below expectations. Included in 4Q16 was a RM36mil provision expense related to its 35.7%-owned joint venture in Algeria, Almiyah Attilemcania SPA (AAS). This provision is related to a court-imposed penalty on AAS for an alleged breach of foreign exchange regulations.
“While AAS intends to appeal against the penalty, Malakoff had decided to provide for the potential penalty. We gather from the company that it does not expect more provision for the same case in the future,” it said.
CIMB Research said during Malakoff’s analyst briefing, Malakoff revealed that Tanjung Bin Energy (TBE), which started operating in March 2016, incurred an after-tax loss of RM37mil in FY16 even though it was generating positive operating cashflows.
The accounting loss was a result of an accounting standard, where only a part of the capacity payment received was recognised as revenue while the rest was booked as deferred income.
“The company expects TBE to generate accounting profit in 2017. However, we believe the profit will be minimal due to high depreciation charges and interest expenses associated to the plant.
“We expect Malakoff’s 2017 core net profit to contract 16% due to the expiry of the first-generation power purchase agreement (PPA) of its Segari Energy Ventures (SEV) plant by mid-2017.
“We expect Malakoff’s earnings to fall further in 2018 as a result of the full-year impact of SEV’s PPA expiry. However, we believe Malakoff’s earnings will rebound in 2019 as scheduled debt repayments could lower its interest expenses in that year.
“Despite the weak earnings, we maintain our Hold call on Malakoff. Its dividend yield of close to 4% in 2017 is relatively decent compared to the overall stock market’s c.3%. The key upside risk to our call is lower-than-expected operating expenses while key downside risks are weaker-than-expected associate and JV earnings,” said CIMB Research.
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