Since its IPO listing on 14 May, Malakoff Corp’s share price has been hovering around its IPO price level of RM1.80 for the past 3 weeks. According to the Bloomberg analysts’ consensus, 13 out of the total 17 analysts have a buy call on Malakoff with an average 12-month target price of RM2.06. On Thursday, Macquarie Equities Research (“MER”) had initiated its coverage over the independent power producer with an Outperform recommendation and a target of RM2.25.
 
Read on for excerpts from the report titled “Re-energised”…

Initiate with Outperform; TP RM2.25 (28% TSR)
MER initiates coverage on Malakoff, Malaysia’s largest independent power producer (IPP), with an Outperform recommendation and a target price of RM2.25 representing, 28% total share return from current levels. Malakoff’s long-term power purchase agreements (PPAs) on 5,346MW of effective capacity in Malaysia and 690MW overseas, with cost pass-through mechanisms and predictable long-term debt repayment schedules, provide visible cashflows and earnings. Upside risks to MER’s earnings include extension of expiring PPAs and winning of new power/water plant projects both in Malaysia and overseas. Meanwhile, trading at 7.4x 16E adj EV/EBITDA and offering a 4.6% dividend yield, Malakoff is attractively valued vs regional peers.
 
Undemanding valuations with yield upside
Malakoff’s 4.6% 16E dividend yield, based on a 70% payout ratio, MER believes will make it a key draw for investors. With construction of new plants funded largely by project debt, 16E distributable cashflow yields are a healthy 11.6%, providing for both dividend support and upside. Meanwhile, MER’s DCF-derived sum-of-parts TP of RM2.25 implies 18.9x 16E PER and 8.2x 16E adj EV/EBITDA – well within the range of listed Malaysian companies and utilities under its coverage.
 
Steady core business and visible cash flows
MER expects Malakoff to deliver a 5.8% EBITDA CAGR 14-17E as its 1,000MW Tanjung Bin Energy (TBE) plant comes on stream in 1H16. Meanwhile, its six operating plants in Malaysia have a remaining average PPA life of 14 years. Cashflow risks are minimised by fuel cost pas s-through and scheduled escalations related to operating costs. A capable management and operations team is in place to keep plant availability and efficiency levels high to ensure each plant meets appropriate benchmarks to qualify for their respective capacity payments. As 85% of Malakoff’s debts are in the form of bonds with visible repayment profile, there is a rather predictable long-term repayment schedule.
 
Longer-term growth potential
MER believes Malakoff is well placed to take part in the planting up process in Malaysia, where MER estimates at least 1,000MW of new generating capacity is required from 2019 onwards. Also, Malakoff’s ventures into overseas markets provides it the experience to further expand its earnings from international sources from the ~39% contribution to 2014 PBT. Malakoff is undertaking feasibility studies of exporting electricity to Singapore and Thailand. Additionally, growing demand for power and water plants within Asia and the MENA region should in MER’s view provide medium- to long-term growth opportunities.
 
Key risks mitigated
Improved fuel quality agreements and terms in new PPAs have reduced earnings risk from fuel-related problems following issues in 2013. Also, the commissioning of the TBE plant in 1H16 will mitigate lower capacity payments from its Segari plant and the expiry of Port Dickson Power PPA in 2016. As of May 2015, TBE plant is behind schedule by 4.8% and Malakoff is aiming to close the gap. Insurance policies are expected to mitigate revenue and cost risks. Malakoff’s venture into foreign markets may add to LT earnings volatility.
 

Source: Macquarie Research - 26 Jun 2015