Malakoff Corporation Berhad (Malakoff) is doing well, at the back of its latest acquisition deal in Kedah and Perlis, and earnings stability, according to Kenanga Research (Kenanga).
In its Company Update today (Oct 30), the research house said Malakoff is acquiring a 49% equity stake in E-Idaman Sdn
Bhd (EISB) for RM133.2 million, which is a solid waste management firm with a concession expiring in 2033.
“While earnings enhancement is small (c.5%), the latest deal speaks for MALAKOF’s efforts in looking for new earnings streams,” it said.
Pending the deal, Kenanga keeps its MARKET PERFORM call, and its forecasts at unchanged SoP-derived TP of RM0.63, with no adjustment based on 3-star rating ESG.
The stock, it added is supported by a decent dividend yield of more than 5%.
“While we like Malakoff for its earnings stability underpinned by IPPs and concessions, there is room for improvement in its risk management to reduce or even eliminate the unnecessary earnings volatility such as unplanned outage as well as fuel margin fluctuation,” it said.
Kenanga’s risks to call include recommendation include regulatory risk, unplanned outages leading to lower capacity payment thus affecting earnings, non-compliance of ESG standards set by various stakeholders, and earnings volatility stemming from fuel margin gains or losses.
The research house noted EISB, which Malakoff is acquiring, provides waste collection and disposal services for municipal waste under a 22-year concession (from 2011 to 2033) granted by the federal government for the provision of solid waste collection and public cleaning
management services for Kedah and Perlis.
“EISB reported net profit of RM27.7 million in FY22 with a total equity of RM137.3 million. The balance 51% equity stake in EISB is owned by Cenviro Sdn Bhd (a majority-owned investee company of Khazanah).
“The acquisition is expected to be completed within the next six months,” it added.
The acquisition is valued at 9.8x FY22A PER and 2.0x FY22A PBV, which the research house believes to be fair, given that Malakoff acquisition of Alam Flora of 10x PER and 3.3x PBV in Aug 2018.
“Based on our estimates, the acquisition will boost our FY24F earnings by c.5% and our SoP-valuation by 2.0 sen per share, and raise its net debt and gearing of RM7.17 billion and 1.43x as at end-Jun 2023 to RM7.31 billion and 1.46 times, which are still manageable.
“More importantly, this latest deal speaks for the group’s efforts in looking for new earnings streams to replace its expiring PPAs. Two of its power plants had already expired recently, for example, the 436MW PD Power Plant in Feb 2019 and 640MW GB3 Power Plant in Dec 2022.
“In addition, the PPA of its 350MW Prai Power Plant will expire in 2024, 1,303MW SEV Power Plant in 2027 and 40%-owned Kapar Power Plant in 2029,” it added.
