Malakoff stays on Affin Hwang Research Buy list

KUALA LUMPUR: Affin Hwang Capital Research is maintaining its Buy call on Malakoff, despite lowering its target price to RM1.48 from RM1.65, given the implications of the recent change in its depreciation policy, which lowered the residual value of its existing power plants. 

“Nonetheless, valuation is still undemanding and we believe improvement in earnings in FY17 will act as a positive catalyst for the share price in 2017,” it said on Wednesday.

Affin Hwang Research said the change in its target price was mainly due to the change in its assumptions on the residual value of the power plants post the expiry of their current power purchase agreement (PPA). 

“The change is also to match the recent change in Malakoff’s depreciation policy, as it has reduced the residual value of its gas fired power plants significantly, indicating that the probability of getting a renewal for its respective PPAs are now lower,” it said.

The research house expects Malakoff to maintain its dividend payout in the range of 75%-82% for 2017 and 2018, which is in line with the official policy of no less than 70% of the group profit after tax and minority interests (PATMI). 

“As such we estimate that the group will be able to generate close to RM500mil to RM700mil in cash (free cash flow – interest – dividend) which can be used to pare down its debt and lower its gearing from the current 2.5 times net ratio.

“EBITDA growth will likely continue into FY17, as Malakoff will benefit from a full year contribution from Tanjung Bin Energy (TB4) which only started contributing in 2QFY16. 

“Although TB4 is yet to be profitable (PATMI) due to additional barging costs, we are expecting a turnaround in 2018, as the completion of the new jetty will help eliminate the need for the additional barging.

“We believe that the current valuation is undemanding based on our new DCF-based 12 month TP of RM1.48, as the recent drop in share price is unwarranted, given the fundamentals of the company remain intact despite changes in the depreciation policy,” said Affin Hwang Capital Research.