KUCHING: Affin Hwang Investment Bank Bhd (AffinHwang Capital) has revised down its target price for Malakoff Corporation Bhd (Malakoff), due to the change in the research firm’s assumptions on the residual value of the power plants post the expiry of their current power purchase agreement (PPA).
According to a research note, the change is also to match the recent change in Malakoff’s depreciation policy as the group has reduced the residual value of its gas fired power plants significantly, indicating that the probability of getting a renewal for its respective PPAs are now lower.
AffinHwang Capital expected earnings before interest, tax, depreciation and amortisation (EBITDA) growth for Malakoff to continue in 2017, with Tanjung Bin Energy (TB4) to contribute for the full year as opposed to only nine months in 2016.
Post 2018, the research firm believed that the EBITDA growth will be more difficult, due to the expiry of Port Dickson (PD) Power PPA in early 2019, and that growth from financial year 2013 to 2017 (FY13-FY17) was mainly driven by capacity growth.
“Given that there are three more PPAs expiring in 2022 to 2027, Malakoff needs to be more aggressive in looking for new opportunities locally and aboard to replace the earnings shortfall.
“As it takes around five years to build and commission a power plant, Malakoff will need to secure or win a power plant bid by 2018 and 2019,” the research firm said.
On the domestic front, AffinHwang Capital believed that the tender for any power plant projects (more than 1,000 megawatts (MW)) is unlikely to be issued by the Energy Commission (EC).
The research firm has however noted that there is likelihood that Malakoff’s existing PPAs could be renewed at a lower rate, if the commercial operation dates (COD) of several new projects are delayed, to maintain the stability in power supply.
It further noted that the only projects that are available locally are the large-scale solar projects (approximately 50MW), but they are not significant enough to compensate for the expiring gas fired power plants.
“Hence, Malakoff may need to seek for opportunities aboard,” it said.
As for the group’s current net gearing ratio, although it is high at 2.5-fold, AffinHwang Capital did not think this presents an issue to Malakoff as its debt is backed by the cash flow stream from the PPAs, which is signed with Tenaga Nasional Bhd (TNB).
The power plants are built based on a 70/30 structure, ie 70 per cent using debt or borrowings and the remaining 30 per cent with equity.
“We don’t think they will have any problem servicing their debt, as they are generating close to RM2.7 billion to RM2.8 billion in EBITDA, while interest expenses are only around RM900 million to RM950 million, hence there is room for Malakoff to manoeuvre,” the research firm said.
As the research house is only expecting Malakoff to pay out around 75 per cent to 82 per cent of the group’s profit after tax and minority interests (PATMI) as dividend, Malakoff should accumulate around RM500 million to RM700 million (free cash flow (FCF) – interest – dividend) in cash that can be used to pare down the group’s debt.
However, the research firm did not see a need for Malakoff to do so ahead of schedule, as it would lower the internal rate of return for those power plant projects.