AFFIN Hwang Capital has resumed coverage on Malakoff Corporation Bhd with a hold call as around 18% of its power purchase agreements’ (PPA) capacity nears expiry in the next four years.
However, the current dividend yield of 6.8% would likely provide some downside protection to the current share price.
Affin Hwang analyst Ng Chi Hoong said: “Given that 18% of Malakoff’s capacity of 5,393MW that is contributing to the grid will be expiring in the next four years, it is crucial for the company to seek new avenues of growth.
“The acquisition of Alam Flora is only enough to compensate for the shortfall in profit from the recent disposal of the McArthur Wind Farm. Given the change in the capacity build-up mix, bidding for new power plants will likely only occur in 2024/25.”
Although management is also actively pursuing opportunities in the renewable energy segment, the overall size of these projects is still insignificant, despite the higher returns.
Despite the ability to secure some new renewable projects recently, most of them are relatively small in size, and have an installed capacity of no more than 30MW. The Port Dickson power plant, which expired in 2019, had an installed capacity of around 440MW.
Given that most of the planned renewable energy (RE) projects in Malaysia in the next four to five years focus on Large Scale Solar (LSS), competition is likely to remain fierce and Malakoff doesn’t have a clear advantage.
The acquisition of Alam Flora might provide the company an edge in securing future waste-to energy (WtE) projects, but this is not a must-have condition.
“Although the dividend yield at 6.8% might seem attractive to some, we don’t think that it is sustainable in the long run due to the expiring capacity in the next few years, which management is trying to address. Our sum-of-the-parts-based target price of 95 sen implies a price by volume of 0.85x (still above -1SD of its historical average),” said Ng. — April 17, 2020
