THE domestic power sector may offer scarce opportunities to many companies seeking to expand, but that is not quite the impression one gets of Malakoff Bhd.
Sources say the company is thrashing out (and finalising) the details for the acquisition of SKS Ventures' 2,100 megawatt (mw) Tanjung Bin power plant in Johor. If the deal comes through, it will up Malakoff's effective generating capacity by 70 per cent to 5,100 mw.
Sure, the deal has been lying in wait for a while now. Since Tan Sri Syed Mokhtar Albukhary emerged as substantial shareholder in Malaysian Mining Corp Bhd (MMC), the market has been anticipating that MMC's 23 per cent-owned subsidiary Malakoff will see the injection of several of his privately-held power assets. Syed Mokthar controls SKS Ventures.
However, industry observers say now is the best time if any for Malakoff to get the deal going. In fact, it is also believed that Malakoff management had alluded to that in discussions with several market participants recently.
An analyst says, with all its existing acquisitions and upgrades in place, it is indeed a good time for Malakoff to be on the lookout for new assets.
Tanjung Bin is the country's first coal-fired independent power producer (IPP) project. The plant is estimated to cost RM7.9 billion and will be built at Tanjung Bin, in Johor across from the Pulai River from Port of Tanjung Pelepas. It is scheduled to begin operations in August 2006.
If the acquisition comes through, the country's largest IPP Malakoff's current capacity of 1,705mw will get a tremendous boost.
“No one will come to a close second to Malakoff. It has simply created another category for itself,” says a power analyst.
The second largest will be Powertek Bhd that has an effective capacity of 1,490mw (including fast track Panglima Power).
Most analysts contacted are hesitant to make projections on earnings because much depends on the deal as well as pricing. Also, the plant comes fully on stream only in 2006. However, an analyst says, one has to bear in mind that the capacity of Tanjung Bin is bigger than Malakoff's current capacity of 1,705mw (including the greenfield Prai Power whose commercial operation date is March 2003, its total capacity would be 2055 mw).
The analyst says: “Pure contributions from power business contributes some RM200 million to Malakoff. Hence, I would safely say that its contribution to Malakoff's pre-tax earnings would not be less than RM150 million (with Tanjung Bin).”
It is common knowledge that the group has always maintained that any acquisition will have to meet its internal rate of return of at least 12 per cent and that the acquisition should be value accretive to the group. Tanjung Bin, which has signed a power purchase agreement (PPA) with Tenaga Nasional Bhd, fits snugly into these criteria.
The PPA signed between Tenaga and SKS Ventures was a landmark deal in that it was the first time it incorporated a demand risk-sharing clause. Under the scheme, the IPP will be paid a lower capacity charge, with Tenaga guaranteeing only up to 85 per cent of the capacity charge, sufficient to cover the fixed cost and debt-servicing component of the project. In contrast, the analyst says, the previous agreements entailed Tenaga paying for full capacity charge, regardless of the demand scenario.
Analysts are least worried that with this acquisition, the company will be over reaching itself. It is generating “free cash” exceeding RM550 million every year that should make it eager to look for good, new acquisitions. Until then, however, it will continue to be an attractive dividend paymaster. Shareholders, says an analyst, can look forward to a gross dividend per share of at least 20 sen a share.
But not all view Malakoff's potential acquisition of Tg Bin positively. One analyst says perhaps “it's a bit heavy to have so many expansions and acquisitions in a matter of a few years.”
His main concern is that Malakoff, as an IPP, pays good dividends - one of its biggest appeal.
However, acquiring huge power assets, he worries, may eat into its ability to pay good dividends.
In 2002, the share price gained 21 per cent and outperformed the market by 30 per cent. It finished Thursday at RM4.18.
Malakoff is, without doubt, the pick of the sector among most power analysts given the management's sound track record (helmed by low key professional Ahmad Jauhari Yahya), its steady income stream and defensive nature (this is particularly appealing in an uncertain environment such as now). It has also never given investors any rude surprises.
Needless to say, Malakoff has a knack for completing its projects way ahead of schedule. Its fast track project GB3 Sdn Bhd in Lumut was completed in November 2002 – two-and-a-half months ahead of its engineering, procurement and construction contract schedule.
However, this was made possible by the fact that Malakoff had effectively begun works on the plant two months ahead of signing its PPAs, which at that point some quarters perceived as rather risky. That concern, however, has obviously been put to rest.
This is actually the year it all comes together for Malakoff, in terms of higher returns versus lower investment cost. Its acquisition of a combined cycle gas-fired plant Prai Power will be completed by March 2003. Malakoff, from second half FY03 onwards, will consolidate contributions from this new plant.
The 640 mw GB3 plant in Perak has been successfully upgraded to combined cycle operations, hence raising Malakoff's overall generation capacity to 1,705 mw or approximately 25 per cent of the IPP capacity in the peninsula. Analysts expect GB3 to account for some 15-16 per cent of the group's overall pre-tax profits in FY03.
The dark spot in the whole picture, however, remains the long delayed acquisition of 40 per cent in 2,420 mw oil, gas and coal-fired plant Kapar power plant from Tenaga Nasional Bhd, much to the frustration of Malakoff. The deadline to complete the acquisition has been extended for the umpteenth time, the latest being April 2 2003. The teething problems over at the 500mw coal-fired block and a few other conditions precedent have been holding back the purchase for over a year.
“Despite reassurance from Tenaga and Malakoff's management, the protracted nature of the deal has led many to believe that the deal will not be completed. We share the same sentiment and only regard Kapar as potential bounty for the group,” says an analyst from a local research house.
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