Malakoff's Saudi assets purchase to fill earnings gap


KUALA LUMPUR: Kenanga research expects improved sentiment for Malakoff Corp Bhd for raising its stake in Saudi Arabia's water and power plant assets.

Following the announcement, the research house raised the stock to outperform at a higher target price of RM1 from 90 sen previously.

It said in a note that the move will boost its bottomline by 18% while filling the earnings gap left by the expired Port Dickson power plant's PPA extension and tariff cut at Segari Energy Ventures.

Malakoff announced yesterday it had entered an agreement to acquire the entire stake in Desaru Investment Ltd (DIL) from Khazanah for US$70mil.

DIL is a 40% stakeholder in a Malaysian consortium comprising a 40% stake in Malakoff and a 20% stake in Tenaga, which owns about 30% share in two independent water and power plants in Saudi Arabia.

With the purchase, Malakoff will double its stake in these two assets to 24% each in 4Q19.

"In the past three years, the combined associate incomes from these two assets were RM46.8m/RM57.6m/RM47.5m which made up 14%/20%/21% group’s core profit, respectively. 

"As such, upon completion of the acquisition, contributions from these two assets are important as they could make up a-third of the group earnings," said Kenanga.

The independent water and power plants are the first and largest in Saudi Arabia as well as the main water suppliers for the Makkah province. They also form 13% of power and water capacity for the country, and have remaining concession periods of about 10 years.

According to Kenanga, the acquisition is priced at EV/EBITDA of c.8x which it believes is fairly reasonable, being quite close to MALAKOF’s FY18 EV/EBITDA of 7.8x.

"Assuming yearly contribution of RM47.5m for the next 10 years at 12% effective stake, total earnings collections could be RM475m which is 66% higher than the acquisition price of c.RM287 (USD70m @ 4.10), without taking into account the time value of money, a seemingly good deal," it said.
 

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