June 23, 2015 Malakoff Corporation (MLK MK) Share Price: MYR1.80 MCap (USD): 2.4B Malaysia Target Price: MYR2.00 (+11%) ADTV (USD): 14M Utilities BUY (New) Initiation Key Data | Deleveraging for future growth Shariah status Yes A low-risk power exposure that could potentially play catch- . 52w high/low (MYR) na/na up to the theme for defensives. 3m avg turnover (USDm) 13.7 . Growth opportunities beckon in the form of new generation Free float (%) 75.7 projects and/or potential M&A, hence the deleveraging. Issued shares (m) 5,000 RESEARCH . Initiate coverage with a BUY rating and MYR2.00 TP. Market capitalization MYR9.0B Major shareholders: Largest Malaysia IPP -MMC Corp. Bhd. 37.6% Malakoff Corp is the largest IPP (independent power producer) by -Employees Provident Fund 19.1% capacity in Malaysia. Its effective capacity of 5,346MW represents -Lembaga Tabung Haji 10.0% COMPANY 26% of Peninsular Malaysia’s installed capacity in 2014, placing it second only behind the national off-taker Tenaga. Share Price Performance 2.10 112 It owns majority stakes in five power plants (a sixth is under 2.05 110 2.00 108 construction), and associate stakes in one, all of which are located 1.95 106 along the west coast of Peninsular Malaysia. 1.90 104 1.85 102 1.80 100 Defensive with pockets of growth 1.75 98 1.70 96 Malakoff Corp has defensive characteristics in that 1) it is primarily 1.65 94 Malaysia-centric and 2) its PPAs (power purchase agreements) have May-15 May-15 May-15 Jun-15 Jun-15 Jun-15 Malakoff Corporation - (LHS, MYR) fuel cost pass-through clauses in place. We believe Malakoff Corp Malakoff Corporation / Kuala Lumpur Composite Index - (RHS, %) could play catch-up to the theme for defensives. 1 Mth 3 Mth 12 Mth There are growth opportunities. We expect Malaysia’s reserve Absolute(%) 5.3 na na margin to stay tight in the coming years, meaning new generation Relative to index (%) 8.6 na na plants would still be required beyond 2020. There are also M&A opportunities. Indeed, a key reason for the listing is to deleverage, Maybank vs Market so as to have more financing leeway for new projects. Positive Neutral Negative We initiate coverage with a BUY rating and a MYR2.00 TP. Our TP is Market Recs 6 0 0 derived from a sum-of parts methodology, with each entity valued Maybank Consensus % +/- on a DCF. Tanjung Bin Power contributes MYR0.90/share to our TP. Target Price (MYR) 2.00 2.10 (4.6) On our FY16 forecasts, our TP implies an EV/EBITDA of 7.6x, a PER '15 PATMI (MYRm) 489 429 13.9 of 16.3x, and a net yield of 4.3%. '16 PATMI (MYRm) 613 550 11.4 Source: FactSet; Maybank FYE Dec (MYR m) FY13A FY14A FY15E FY16E FY17E Revenue 4,717.4 5,594.5 5,524.1 6,288.1 6,449.3 EBITDA 1,647.7 2,407.1 2,579.7 2,968.8 2,859.8 Core net profit 161.5 341.5 488.6 612.9 570.9 Core EPS (sen) 4.6 9.7 9.8 12.3 11.4 Core EPS growth (%) (65.5) 111.4 0.5 25.5 (6.9) Net DPS (sen) 4.2 4.5 7.3 8.6 8.6 Tan Chi Wei, CFA Core P/E (x) 39.2 18.5 18.4 14.7 15.8 (603) 2297 8690 P/BV (x) 1.6 1.6 1.5 1.5 1.4 [email protected] Net dividend yield (%) 2.4 2.5 4.1 4.8 4.8 ROAE (%) 4.2 8.7 9.9 10.3 9.3 Jade Tam ROAA (%) 0.6 1.2 1.6 2.0 1.9 (603) 2297 8687 EV/EBITDA (x) na na 8.4 7.0 6.7 [email protected] Net debt/equity (%) 357.6 361.6 211.8 186.7 157.3 SEE PAGE 41 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS PP16832/01/2013 (031128) Malakoff Corporation Contents Page Merit 1: A stable power play 3 Merit 2: Large and Reputable 5 Merit 3: Prime beneficiary of capacity plant-up 8 Merit 4: Expertise in coal 10 Merit 5: Major O&M operator 13 Lease Accounting 15 Financials 17 Segari Energy Ventures 21 GB3 22 Prai Power 23 Tanjung Bin Power 24 Tanjung Bin Energy 25 Port Dickson Power 26 Kapar Energy Ventures 27 Malakoff Wind Macarthur 28 Risks 29 Valuation 30 Appendix 1 – Corporate Structure 32 Appendix 2 – Board of Directors and Key Management 33 June 23, 2015 2 Malakoff Corporation Merit 1: A stable power play ‘Defensives’ in favour. The recent years have seen a surge in demand for 'defensives' such as telecom, gas utilities, consumer and REITs. Despite subdued growth outlooks, stocks prices hit record highs, reflecting a broader macro theme in play. Valuations have also surpassed previous peaks. YTD performance (annual reset) - telecom YTD performance (annual reset) - consumer 100% Digi Maxis TM Axiata 100% Nestle AEON BAT 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% -20% -40% -40% 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Source: Bloomberg Source: Bloomberg YTD performance (annual reset) – gas utilities YTD performance (annual reset) - REITs 70% Pet Gas Gas Msia 100% IGB Axis CMMT Sunway 60% 80% 50% 60% 40% 30% 40% 20% 20% 10% 0% 0% -10% -20% -20% -40% 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Source: Bloomberg Source: Bloomberg Not all about yield. Contrary to popular belief, we note the rally of ‘defensives’ was not entirely driven by dividend yields. In sectors such as telecom and gas utilities, there has been continued yield compression. In our view, the common denominator among the sectors which rallied appears to be a stable and domestic-centric earnings base. Net dividend yield - telecom Net dividend yield – gas utilities 10.0% 6% Digi Maxis TM Axiata Pet Gas Gas Msia 8.0% 5% 6.0% 4% 4.0% 3% 2.0% 2% 0.0% 1% 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Source: Maybank KE Source: Maybank KE June 23, 2015 3 Malakoff Corporation The power sector misses out. Since Malakoff Bhd was privatised in 2007, the Malaysian equity market has lacked a domestic-centric power stock with earnings stability. The current power big-caps consist of 1) Tenaga, which is partly exposed to fuel price volatility and 2) YTL Power, whose assets are largely overseas and hence exposed to forex volatility. Thus, the power sector did not benefit much from the liquidity-fuelled rally for ‘defensives’. At present, the sector still trades at a discount to the market (KLCI) on PER. EBIT – Tenaga (FY08-FY14) 8.0 (MYR b) 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Source: Company, Maybank KE Segmental EBIT – YTL Power FY14 UK (Water) 50% Others 7% Malaysia (Power) 12% Singapore (Power) 31% Source: Company, Maybank KE Filling the gap. In our view, the listing of Malakoff Corp will once again fill the void, providing investors a relatively low-risk exposure to the domestic power sector. Malakoff Corp has defensive characteristics in that 1) it is primarily domestic-centric and 2) has a complete fuel cost pass-through mechanism in place. We believe Malakoff Corp could play catch-up to the theme for defensives. June 23, 2015 4 Malakoff Corporation Merit 2: Large and reputable Largest IPP in Malaysia. Malakoff Corp is the largest IPP (independent power producer) by capacity in Malaysia. Its effective capacity of 5,346MW represents 26% of Peninsular Malaysia’s installed capacity in 2014, placing it second only behind the national off-taker Tenaga. It owns majority stakes in five power plants (a sixth is under construction), and associate stakes in one, all of which are located along the west coast of Peninsular Malaysia. Given its size and status, Malakoff Corp is inevitably linked to any potential new capacity plant-ups, particularly in Malaysia. This, in our view, bodes well for the company’s future growth prospects. Peninsular Malaysia’s installed capacity 25,000 (MW) Malakoff Tenaga Others 25% 20,000 17% 19% 26% 26% 26% 26% 20% 26% 15,000 56% 55% 50% 54% 10,000 51% 51% 50% 50% 47% 5,000 23% 23% 23% 23% 26% 26% 27% 26% 24% 0 2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F Source: Energy Commission, Maybank KE Established tie-ups with major power players. Malakoff Corp is backed by a reputable network of vendors including Alstom Power, GE and Toshiba (Malakoff Corp is a major user of Alstom turbines globally). This strengthens the company’s credibility when bidding for new projects. Malakoff Corp has also established strategic relationships with infrastructure majors such as Sumitomo, IPR-GDF Suez and Acwa Power. These partnerships provide Malakoff Corp with access to 1) international opportunities for new projects, 2) potentially cheaper financing and 3) added expertise related to developing and operating assets in international jurisdictions. Impressive track record in growing capacity. Prior to privatisation, Malakoff Bhd had accumulated an impressive track record in growing its generation capacity. Its effective capacity more than quadrupled from 2002 to 2007. During this period, Malakoff Bhd grew capacity every year, either through 1) participating in new green/brown-field projects or 2) increasing its stake in existing power plants. The number of domestic power plants under its stable grew from two to six during the period.