Malakoff remains a defensive stock pick


MALAKOFF Corp Bhd remains an attractive stock pick for investors due to its valuation and stable income, despite operating in a challenging utility business.

Affin Hwang Investment Bank Bhd analyst Ng Chi Hoong believes the independent water and power producer’s earnings will be relatively stable as they are mostly derived from capacity payments which are not impacted by the offtake, despite a decline in electricity sold to the grid.

“While the revenue may decline due to lower electricity sales, the impact to the bottom line is marginal,” he noted in an email.

In Malaysia, Malakoff has an effective capacity of 5,822MW across six power plants that run on oil, coal and gas, according to its website. Globally, it owns a net capacity of some 588MW of power production and 472,975 cu m of water desalination, with projects in Bahrain, Saudi Arabia and Oman.

It’s also been making inroads into the waste management and environment-related business, having acquired a 97.37% stake in Alam Flora Sdn Bhd as the two firms move to develop waste-to-energy projects.

According to Ng, the group’s current challenge is to revitalise its growth potential, given that 18% of its current capacity will be expiring within the next four years.

“The acquisition of Alam Flora and the venture into renewable energy are not sufficient to compensate for the decline,” he said.

Malakoff’s power plants and waste collection services continued to operate as usual in the first quarter ended March 31, 2020 (1Q20), despite the implementation of Malaysia’s Movement Control Order (MCO) beginning March 18.

“However, the MCO-induced reduction in demand for electricity affected the dispatch of electricity during the period. This resulted in lower revenue from energy payment, but capacity payment remained intact for the power plants,” the group said in a May exchange filing.

Development activities for the recently awarded 2.4MW biogas plant in Kota Tinggi, Johor, and the 55MW small hydro projects are progressing according to approved timelines.

Based on these prospects, a “satisfactory” performance can be expected for the financial year ending Dec 31, 2020.

The water and power producer’s net profit jumped 33.1% to RM89.18 million in 1Q20 from RM67 million a year ago, attributed to contribution from Alam Flora — the acquisition which was completed on Dec 5, 2019.

Revenue, however, declined 11.6% to RM1.77 billion from RM2.01 billion the year before, primarily due to lower energy payment given the decline in applicable coal price at Tanjung Bin Power Sdn Bhd and Tanjung Bin Energy Sdn Bhd.

A weaker dispatch factor at the Segari Energy Ventures Sdn Bhd and Prai Power Sdn Bhd gas plants following scheduled outage maintenance works also dragged overall turnover.

“Its 1Q20 earnings were above our expectations, mainly due to cost savings and higher contribution from the associate. However, the savings might not be sustainable as it is dependent on the maintenance schedule,” Ng said.

Major shareholders of Malakoff have been active in recent months, according to Bursa Malaysia filings dated May 28 and July 7.

The Retirement Fund Inc has grown its stake in the group by 10.51 million shares to a 9.14% stake, while the Employees Provident Fund has acquired 9.86 million units, bringing its shareholding to 12.63%.

Urusharta Jamaah Sdn Bhd, which took over Lembaga Tabung Haji’s non-performing assets, has also bumped up its stake in Malakoff by 3.74 million shares to 10.31%.

“Although the earnings are defensive, we see limited (earnings) growth potential at the moment, hence limiting the upside potential of the stock,” Ng said, adding that the firm currently has a ‘Buy’ call on the stock with a target price of 95 sen.

Malakoff has a 12-month dividend yield of 6.55% and a trailing 12-month price-earnings ratio of 15.16.

Among analysts surveyed by Bloomberg, 11 have ‘Buy’ calls on the stock, while two are recommending ‘Hold’. Malakoff shares closed at 97.5 sen last Friday, valuing the firm at about RM4.76 billion.