MALAKOFF CORPORATION BERHAD

Transcription

1 PublicInvest Research Company Initiation Tuesday, May 5, 2015 KDN PP17686/03/2013(032117) MALAKOFF CORPORATION BERHAD Outperform DESCRIPTION Largest independent power producer (IPP) in Malaysia and SEA in terms of total generation capacity. Ventured into power generation and water production assets in Middle East and North Africa (MENA region) and renewable energy business (wind farm) in Australia. Fair Value IPO Price RM2.18 RM1.80 Expected Return 21.1% Indicative Listing Date 15 May 2015 Market Main Sector Power Bursa Code 5264 Bloomberg Ticker MLK MK IPO Details Offer for Sale Public Issue Utilisation of Proceeds (based on RM1.80/share for Public Issue) Redemption of the Junior Sukuk Musharakah Shares (m) 521,740,000 1,000,000,000 RM m Total 1,800.0 KEY STOCK DATA Market Capitalisation (RM m) No. of Shares (m) MAJOR SHAREHOLDERS (Post-IPO)* MMC Corp EPF KWAP 9, ,000.0 % *Assuming over-allotment option is not exercised Syarifah Hidayatul Akmal T F E syarifah@publicinvestbank.com.my Energised by Tanjung Bin Energy Malakoff is the largest independent power producer (IPP) in Malaysia and Southeast Asia in terms of total generation capacity. Internationally, the Group has presence in Saudi Arabia, Algeria, Bahrain and Oman for power generation and water production, and in Australia for renewable energy. In total, the Group has an effective power generation capacity of 6,036MW (including 210MW renewable energy) and effective water production capacity of 358,850m 3 /day. We expect the upcoming 1,000MW coalfired Tanjung Bin Energy Power Plant, which is scheduled to commence operations on 1 March 2016 to boost the Group s earnings in FY16 and FY17. Reliable cash flow business model, supported by long term power purchase agreement (PPA). The Group s business model is based on contractual operating framework whereby it will receive capacity payments irrespective whether any electricity is generated by its power plants pursuant to its PPAs. We like Malakoff s IPP business model as it provides the Group with sustainable and consistent income streams throughout the concession period. In addition, the weighted average remaining PPA period of about 13 years would translate into secured income to the Group for more than a decade going forward. Higher revenue and net profit in FY16 and FY17. We expect capacity payments from its new coal-fired power plant, Tanjung Bin Energy which is scheduled to commence operations on 1 March 2016 to boost the Group s earnings by 47% and 29% for FY16 and FY17. 70% payout dividend policy. Beginning 1 January 2015, Malakoff has introduced a dividend policy with a dividend payout ratio of not less than 70% of its consolidated net profit. Based on a 70% payout ratio assumption, we estimate its dividend yield to be 3.1%, 4.6% and 5.9% for FY15, FY16 and FY17 respectively. Key risks. (i) Operational plant issues and fuel supply disruptions which could reduce electricity generation or in serious cases could lead to unscheduled outages and negatively affect the Group s revenue, (ii) failure to obtain current PPAs renewal or extension, (iii) unable to secure new PPAs to replenish expiring PPAs, and (iv) delay in Tanjung Bin Energy s commencement of operations Fair value of RM2.18 based on DCF valuation. We derive our fair value of RM2.18 for Malakoff using a discounted cash flow (DCF) valuation. At our fair value, it translates to FY16F P/E of 15.3x and EV/EBITDA of 7.5x. Key catalysts would be securing new projects for power and water generation plants, renewal or extension for its expiring PPAs and additional capacity in renewable energy. KEY FORECAST TABLE FYE Dec (RM m) 2014A 2015F 2016F 2017F 2018F CAGR Revenue 5, , , , , % Pre-tax Profit , % Net Profit % EPS (Sen) % P/E (x) DPS (Sen) Dividend Yield (%) Source: Company, PublicInvest Research estimates 1 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 1 of 19

2 Company Background Introduction Malakoff was incorporated in 1975 as a plantation-based company and ventured into power generation business in 1993 upon disposing its plantation-based asset History of Malakoff Malakoff was incorporated in 1975 as a plantation-based company and was subsequently listed on the Main Board of the Kuala Lumpur Stock Exchange (now known as Main Market of Bursa Securities) in The Group shifted its business direction in 1993 by disposing its plantation-based assets and venturing into the power generation business domestically. The Group expanded its power generation business through developing, commencing operations and acquiring interests in Segari Energy Ventures (SEV) Power Plant in 1996, GB3 in 2001 and Prai Power in The Group had also acquired interests in the Port Dickson Power Plant in 1993 and Kapar Energy Ventures (KEV) Power Plant in Its Tanjung Bin Power Plant commenced operations in Besides the power generation business, the Group acquired Teknik Janakuasa Sdn Bhd in 1998 to manage the operation and maintenance of its own power plants. In year 2000 through its subsidiary Wirazone (now renamed as Malakoff Utilities), the Group ventured into electricity and chilled water distribution business. Malakoff was taken private and subsequently delisted from Bursa Securities in Malakoff changed its name to Malakoff Corporation. Delisting of Malakoff On 17 May 2006, MMC Corporation which was then holding a 22.0% equity interest in Malakoff announced its intention to acquire all assets (other than cash) and liabilities of Malakoff for a total cash consideration of RM9.3bn through its then wholly-owned subsidiary, Nucleus Avenue (M) (NAB). NAB subsequently changed its name to Malakoff Corporation Berhad on 25 April The acquisition was completed on 30 April 2007 and financed via a combination of equity and debt issuances. Malakoff was officially delisted from Bursa Securities on 18 July Since the Acquisition Since the acquisition and while being an unlisted entity, Malakoff continued to expand its power generation business locally and internationally. Domestic Front In 2006 and 2007, its Tanjung Bin Power Plant commenced operations with the first unit in September 2006, followed by the other two units in February and August 2007 respectively. The power plant with 2,100MW installed capacity is the largest coal-fired power plant owned by an IPP and representing approximately 29.8% of Peninsular Malaysia s total installed coal-fired generation capacity of 7,056MW as at 31 December In 2011, The Group was also awarded a 25-year concession for the construction, development, operation and maintenance of Tanjung Bin Energy Power Plant (Tanjung Bin 4) by the Energy Commission. The construction of the 1,000MW generation capacity which involved a capital expenditure of RM6.7bn had started in March 2012 and is expected to commence operations on 1 March As at 30 September 2014, RM5.1bn had been spent. In 2013, the SEV s power plant concessions were extended for another ten years until The Group had also acquired the remaining 75.0% equity interest in Port Dickson Power Plant from Sime Darby Energy in April 2014, turning it into its wholly-owned subsidiary. 2 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 2 of 19

3 International assets include water desalination and power plants in MENA region and wind farm in Australia. International Portfolio The integration of thermal power generation and water production plant is a trend in the MENA region to meet electricity demand while also battling with a water scarcity issue simultaneously. These plants use natural gas or oil in a combined cycle generation process in which steam generated from the gas turbines are fed into steam turbines to generate electricity. At the same time, the steam produced from the gas turbine is supplied back to the desalination plant to distil sea water through a water desalination process. In November 2009, the commercial operations of Shuaibah Phase 3 Expansion Independent Water Producer (IWP) commenced, followed by Shuaibah Phase 3 Independent Water and Power Project (IWPP) in January Both commencements marked the presence of Malakoff Corporation in the Kingdom of Saudi Arabia. Shuaibah IWPP is the first IWPP in the Kingdom of Saudi Arabia. The Group holds an 11.9% interest in Shuaibah Phase 3 Expansion IWP which produces 150,000m 3 /day water using reverse osmosis (RO) technology and a 12.0% interest in Shuaibah Phase 3 IWPP which produces 880,000m 3 /day water and 900MW electricity. Both plants with a combined capacity of 1,030,000m 3 /day are the largest desalination plants in the world. The Group then expanded into the North African region with the commencement of Souk Tleta IWP in April 2011 by taking a 35.7% equity interest. The Souk Tleta IWP supplies water to Algeria s national water company, L Algerienne Des Eaux and also to Algeria s national oil and gas company, Sonatrach. Subsequently in May 2012, the Group acquired a 40.0% interest in Hidd Power, owner of Hidd IWPP in Bahrain. The Hidd IWPP supplies electricity and water to Bahrain s Ministry of Electricity and Water. According to the prospectus, the Hidd IWPP supply accounted for about 34.0% of Bahrain s gross installed power generation capacity and around 58.0% of Bahrain s gross water production capacity in The Group s project company, MCDC in which its wholly-owned subsdiary, Malakoff IL owns a 45.0% indirect equity interest has signed a 20-year WPA with Oman Power and Water Procurement Company SAOC (OPWP) for the Al-Ghubrah IWP in the Sultanate of Oman. The construction of the Al-Ghubrah IWP with an expected water production capacity of 191,000m 3 per day is targeted to be completed and scheduled to commence commercial operations by the third quarter of this year. Besides being an independent power and water producer internationally, the Group expanded its portfolio into renewable energy and acquired a 50.0% participating interest in Australia s Macathur Wind Farm, the largest wind farm in the Southern Hemisphere as at 31 October Its capacity is enough to provide green energy to power approximately 220,000 average-sized homes in the State of Victoria, Australia. Key Milestones Year Achievement/Progress 1975 Incorporated as a plantation-based company / Listed on the Main Board of the Kuala Lumpur Stock Exchange (now known as Main Market of Bursa Securities). Disposed plantation-based assets and subsequently shifted into the power generation business. Port Dickson Power Plant commenced operations in January Segari Energy Ventures (SEV) Power Plant commenced operations with the first block commencing in July 1996 and the second block in January Acquired 100% interest in operation and maintenance company, Teknik Janakuasa Sdn Bhd (TJSB) 3 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 3 of 19

4 /2002 Ventured into electricity and chiiled-water distribution business through Wirazone Sdn Bhd (later renamed as Malakoff Utilities). GB3 Power Plant commenced operations as an open-cycle gas turbine (OCGT) power plant in December 2001 and later converted to combined-cycle power plant (CCGT) in November Prai Power Plant commenced operations in June Acquired 40.0% interest in Kapar Power Plant / / Acquired 20.0% interest in Dhofar Power Company, owner of OCGT power plant in the Sultanate of Oman. Tanjung Bin Power Plant commenced operations with the first unit in September 2006, followed by the other two units in February and August 2007 respectively. Upon acquisition by Nucleus Avenue (M) Sdn Bhd, Malakoff was renamed as Malakoff Corporation on 25 April 2007 and subsequently delisted from Bursa Securities on 18 July Acquired 12.75% interest in CEGCO, owner of multi-fuel power plants in Jordan. Disposed 20.0% equity interest in Dhofar Power Company following the decision of the Oman government to restructure Oman s electricity industry. Shuaibah Phase 3 Expansion IWP commenced operations in November 2009, followed by the Shuaibah Phase 3 IWPP in January Souk Tleta IWP commenced operations in April Awarded concession for the construction, development, financing, ownership, operation and maintenance for the Tanjung Bin Energy Power Plant for 25 years. Disposed 12.75% interest in CEGCO. Acquired 40.0% equity interest in Hidd Power, owner of Hidd IWPP. Acquired contractual rights to provide operation and maintenance services to the Tanjung Bin Power Plant from Hicom Power. Formed MCDC with partners and undertook the design, construction, ownership, financing and operation and maintenance of the Al-Ghubrah IWP Acquired 50.0% participating interest in Macarthur Wind Farm, Australia Executed agreements for the extension of the term for the Segari Energy Ventures (SEV) Power Plant for another 10 years until Acquired the remaining 75.0% equity interest in Port Dickson Power Plant. Also acquired 100.0% equity interest in PDP O&M, which provides operation and maintenance services to the Port Dickson Power Plant Relisting on the Main Market of Bursa Securities Source: Company Prospectus, PublicInvest Research 4 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 4 of 19

5 Malakoff Corporation today Main areas of business are independent power generation in and outside Malaysia, renewable energy, operations and maintenance, electricity and chilled water distribution and project management. Largest IPP in Malaysia and Southeast Asia with effective generation capacity of 5346MW. Malakoff s main areas of business are: (i) independent power generation business in Malaysia; (ii) independent water production and power generation business outside Malaysia; (iii) development of renewable energy projects; (iv) operation and maintenance business for power and water plants; (v) electricity and chilled-water distribution business; and (vi) project management business The Group is currently the largest independent power producer (IPP) in Malaysia and Southeast Asia in terms of total generation capacity. It has six power plants in Peninsular Malaysia with a total effective generation capacity of 5,346MW that run on oil, gas and coal, representing approximately 25.6% of Malaysia s total generating capacity as at 31 December The Group owns three combined-cycle gas turbine (CCGT) plants, namely Segari Energy Ventures (SEV), GB3 and Prai Power with generating capacity of 1,303MW, 640MW and 350MW respectively. The Port Dickson Power Plant is open-cycle gas turbine (OCGT) with 436.4MW generating capacity. Its coal-fired thermal power plant, the Tanjung Bin Power Plant has a 2,100MW generating capacity and is the first private coal-fired power plant in Malaysia while also being one of the largest coal-fired IPP in Southeast Asia by generating capacity. The Group also owns 40.0% equity interest in multi-fuel power plant, Kapar Energy Venture (KEV). A new coal-fired thermal power plant with a generating capacity of 1,000MW, Tanjung Bin Energy is currently under construction and scheduled to commence operations on 1 March Management has confirmed the earlier construction delay has been rectified and the plant is currently on track to commence operations as per schedule. All electricity generated from the power plants are sold to Tenaga Nasional (TNB) pursuant to long-term Power Purchase Agreements (PPAs). On the international front, the Group currently has presence in Saudi Arabia, Algeria, Bahrain and Oman via water production and power generation businesses. In 2013 the Group expanded into Australia in the renewable energy space. Cumulatively, the Group has effective water production capacity of 358,850m 3 /day and power generation capacity of 690MW (including 210MW renewable energy). Another water production plant with a generating capacity of 191,000m 3 /day, Al Ghubrah IWP in Oman is currently under construction and scheduled to commence operations by the third quarter this year. Besides being an IPP, the Group has also ventured into electricity and chilled water distribution business through Malakoff Utilities, its wholly-owned subsidiary. The subsidiary supplies electricity to all buildings in Kuala Lumpur Sentral Development, a 72-acre mixed development of offices, hotels, residences, retails and transit hub on an exclusive basis based on an 11-year licence issued by the Energy Commission. The licence will expire on 14 October 2017 and is renewable for another ten years. Electricity is bought in bulk from Tenaga Nasional and distributed to buildings and individual off-takers located within Kuala Lumpur Sentral area at tariff rates approved by the Energy Commission. Malakoff Utilities also supplies chilled water for air conditioning from its district cooling plant which is located in the surrounding area to Plaza Sentral office suites and other buildings located within the proximity pursuant to chilled water agreements that will expire between 2027 and All agreements are renewable upon mutual agreement of the parties concerned however. In addition, the Group also provides operation and maintenance services to its own power plants as well as to power and water plants owned by certain associates, joint venture and third party clients. The Group s project management business primarily involves plant design review and construction monitoring for its own power plant projects. Previous projects include Segari Energy Venture (SEV), GB3 and Tanjung Bin power plants, while the current undertaking is the Tanjung Bin Energy plant. 5 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 5 of 19

6 Table 1: Power generation and water production assets Source: Company, Company Prospectus, PublicInvest Research 6 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 6 of 19

7 Figure 1: Location of power generation and water production assets Source: Company Figure 2: Effective power generation capacity by country Source: Company Prospectus, PublicInvest Research 7 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 7 of 19

8 Figure 3: Effective water production capacity by country Source: Company Prospectus, PublicInvest Research Key Shareholders The key shareholders of Malakoff are MMC Corporation (MMC), Employees Provident Fund (EPF), Retirement Fund Incorporated (KWAP), SCI Asia and SEASAF. Pre-IPO, the shareholders equity interests in the Group are as follows: MMC 51% (through MMC 22.4% and Anglo-Oriental (Annuities) (AOA) 28.6%), EPF 30%, KWAP 10%, SCI Asia 6.5% and SEASAF 2.5%. Table 2: Pre-IPO and Post-IPO Key Shareholdings Pre-IPO Post-IPO* Shareholders No. of shares % shareholding No. of shares % shareholding MMC 897,695, % 897,695, % AOA 1,142,304, % 992,738, % EPF 1,200,000, % 972,138, % KWAP 400,000, % 324,046, % SCI Asia 260,000, % 210,630, % SEASAF 100,000, % 81,012, % IPO 1,521,740, % - Bumiputera Institutional Investors 550,000, % - Other institutional and selected investors 729,240, % - Retail investors 242,500, % Total 4,000,000, % 5,000,000, % Source: Company Prospectus, PublicInvest Research, *assuming the over-allotment option is not exercised Business Model All electricity generated is sold to TNB pursuant to long-term PPA with fuel-cost pass through feature. Malakoff s business model as an independent power producer (IPP) in Malaysia is based on a build-own-operate basis. All electricity generated from the IPP power plants are sold to Tenaga Nasional (TNB) pursuant to long-term power purchase agreements (PPA) between the Group and TNB with fuel-cost pass through features. The initial term of PPA is usually 21 years beginning from the commercial operation date (COD) of the respective plant s first unit for gas-fired power plant and 25-years for coal-fired power plant with an option to extend for up to three additional periods of five years each. 8 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 8 of 19

9 In general, Malakoff will receive the following payments from TNB at various rates according to individual power plant as stipulated in the respective PPA: TNB will pay capacity payments irrespective whether any electricity is being despatched from the power plant provided the plant makes available daily capacity to TNB and meets certain performance target. (i) Capacity payments A fixed payment to cover the power plant s fixed and capital costs, and based on the plant s tested annual available capacity. TNB will pay the available capacity payment irrespective whether the Group despatches the power generated from the power plant as long the respective power plant makes available a daily available capacity to TNB and meets certain performance targets stipulated in the PPA. The daily available capacity is declared by the Group to TNB on a daily basis. (ii) Energy payments A payment to cover fuel costs and variable operation and maintenance costs which are incurred when electricity is despatched from the power plant. (iii) Start-up payments Payment to compensate for any start-up requested by TNB in excess of a predetermined number of start-ups set forth in the respective PPA. (iv) Test-energy payments Payment to cover fuel costs for the electrical energy despatched from the power plant during the test period, which include start-ups and commissions, revalidation testings, re-commissioning after outages and any tests requested by the Group. Competitive Strengths Malakoff s key competitive strengths are as follows: Business model provides sustainable and consistent cash flows throughout the concession period. Reliable cash flow business model, supported by long term PPA. The Group s business model is based on contractual operating framework whereby all its generating capacity is fully contracted for, based on the long term PPAs. The Group would be collecting capacity payments irrespective whether any electricity is generated by its power plants, provided the power plant makes available the daily committed availability as per daily declaration to TNB and meets certain performance targets stipulated in the respective PPAs. Besides the capacity payments which cover power plant s fixed and capital costs, the Group will also be paid energy payments which cover fuel costs as well as operation and maintenance costs when power is generated from the power plant and being delivered to TNB s grid. As the operating costs are mostly covered by the capacity and energy payments, we believe its business risk would be minimized. According to the prospectus, Malakoff believes it has the longest remaining PPA term among the operating IPPs in Malaysia, with a weighted average remaining PPA period of about 13 years compared to its closest competitor with approximately 11 years. Total capacity and energy payments from its existing SEV, GB3, Prai and Tanjung Bin power plants of RM5,375.5m, RM4,525.2m and RM5,054.6 for FY12, FY13 and FY14 respectively contributed to more than 90% of the Group s total revenue for the said period. We like Malakoff s IPP business model as it provides the Group with sustainable and consistent income streams throughout the concession period. In addition, the remaining PPA term would translate into secured income for more than a decade going forward. Additional capacity payments from the upcoming Tanjung Bin Energy Power Plant are expected to boost earnings in FY16 and FY17. Beneficiary of coal-based power generation, higher revenue and net profit from upcoming Tanjung Bin Energy coal-fired power plant. Malakoff currently owns the 2,100MW coal-fired Tanjung Bin Power Plant, representing approximately 26.0% of Peninsular Malaysia s total installed coal-fired capacity of 8,066MW, according to our estimate. With the upcoming 1,000MW Tanjung Bin Energy Power Plant scheduled to come on-stream on 1 March 2016, the Group would have a total of 3,100MW coalfired generating capacity, bringing it up to around 34.2% of Peninsular Malaysia s total installed coal-fired power plant capacity of 9,066MW. We expect capacity payments from Tanjung Bin Energy Power Pant to boost the Group s revenue and net profit for 9 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 9 of 19

10 FY16 and FY17 (Please refer to the Valuation section for further details). According to Energy Commission s outlook on fuel utilisation in the Peninsular Malaysia Electricity Supply Industry Outlook 2014, gas usage will be substantially reduced due to a shift in base-load fuel from gas to coal. The increasing share of coal in the nation s overall power generation fuel mix is compelled by its cheaper cost compared to gas for power generation and would therefore benefit Malakoff. Figure 4: Energy Commission s projected gas and coal consumptions Source: Energy Commission Higher chance to obtain PPA extension for PD Power due to potential delay in constructing new power plants and to maintain reserve margin at 25%. Existing land for capacity expansion Additional despatch bonuses Potential PPA extension. According to various news reports, the Energy Commission is considering extending the concessions of some existing power plants which are expiring in the next few years due to the potential plant-up delays of recently-awarded power plant projects. This is certainly positive for the Group, as its Port Dickson Power Plant PPA expires in January The Port Dickson Power PPA is renewable for an additional three terms of five years each upon mutual consent of parties involved. As the Malaysian Government plans to maintain power reserve margin at 25%, we believe there will a higher chance of near-term expiring PPAs to be extended as we estimate the country s reserve margin will drop to below 20% next year should the expiring PPAs not be extended. According to management, PD Power is a peaking plant, therefore the plant is still in a good condition. In addition, its close proximity to the central region would be an added advantage for consideration. Existing land for capacity expansion. Malakoff has existing land of approximately 400ha with average remaining lease of 47 years throughout Peninsular Malaysia with ready access to transmission infrastructure. The land can be used for capacity expansion or other potential projects. The Group is currently conducting a feasibility study to build a new 1,000MW coal-fired power plant at the existing Tanjung Bin site for export to Singapore and another 1,000MW coal-fired power plant in North of Peninsular Malaysia for export to Thailand. Despatch bonuses, on top of capacity and energy payments As the coal-fired power plants are deemed as base-load power plants, more electricity is being despatched by its Tanjung Bin Power Plant and the respective PPA provides for despatch bonuses when the plant despatches electricity beyond the pre-defined thresholds set forth in the agreement. The Tanjung Bin Power Plant received despatch bonuses, also known as daily utilisation payments of RM198.8m, RM170.5m and RM207.4m for FY12, FY13 and FY14 respectively, representing approximately 10 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 10 of 19

11 3.6% 3.7% of the Group s total revenue for FY12 to FY14. With Tanjung Bin Power Plant s PPA expiring in 2031, another sixteen years of potential bonus payments is certainly a plus point. Besides Tanjung Bin, its SEV plant also has availability factor bonus if the plant s availability factor is more than 92% and dependable capacity is not less than 1,238MW for the preceding twelve months capacity billing periods. SEV plant received availability factor bonus of RM33.0m and RM24.7m for FY11 and FY12 respectively. However, the plant did not receive any bonus in FY13 as its equivalent availability factor for the year was 91.6%, slightly below the threshold level of 92% due to unscheduled outages in the fourth quarter of the financial year arising from turbine vibration problems. Its upcoming Tanjung Bin Energy Power Plant also has this incentive benefit should it meet certain performance targets. To benefit from growing electricity demand in Asia and Middle East countries. Plans to increase power generation capacity to 10,000MW and water production capacity by 150% by year Expanding into renewable energy and distribution of electricity and chilled water Leveraging on expertise as IPP. Malakoff s expertise and experience as an independent power and water producer and having acted as a developer, operator and owner of those assets would enable the Group to tap into regions with expanding electricity and water demand. According to the World Energy Outlook 2014 Factsheet by International Energy Agency, world electricity demand is expected to increase by almost 80% over the period and bulk of incremental electricity demand are led by China (33%), India (15%), Southeast Asia (9%) and the Middle East (6%). In addition, the Group believes they will capitalise from the growth in renewable energy sector in Australia, which may offer opportunities for further capacity expansion due to the Macathur Wind Farm s strategic location for wind energy generation. Expansion plans. The Group plans to expand its power generation capacity to 10,000MW and water production capacity by about 150% by 2020 through acquiring new or existing power and water generation assets. It is currently in discussions with Petronas to participate in a 1,300MW co-generation power plant in Johor s RAPID project. The Group is also exploring a waste-to-energy project, which involves the production of electrical energy from incineration of waste in Malaysia. The Group has been prequalified for and is in the process of submitting a bid for the waste-to-energy project for Kuala Lumpur at 1,000tonnes per day and 25MW capacity project. It also plans to expand its electricity and chilled water distribution business in major cities in Malaysia including the Tradewinds Square Project in Kuala Lumpur. Financials Revenue. Malakoff s revenue is mainly contributed by its IPP in Malaysia through capacity and energy payments pursuant to the long term PPAs. Capacity and energy payments from its current five power plants contributed to about 90.6%-92.3% of the Group s total revenue for FY12 to FY14. Table 3: Capacacity and Energy payments Revenue recognised from Power Capacity Energy Capacity Energy Capacity Energy Plants payments payments payments payments payments payments (RM m) SEV GB Prai Tanjung Bin PD* Total Source: Company Prospectus, PublicInvest Research, *PD Power Plant was fully acquired in May Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 11 of 19

12 On top of capacity and energy payments, Malakoff also receives availability factor bonus from its SEV Power Plant and daily utilisation payment from its Tanjung Bin Power Plant. Revenue from the electricity and chilled water businesses also contribute to the electricity generation and distribution segment. This segment is the biggest contributor to the overall revenue with contribution of 97.6%, 97.1% and 96.5% to FY12, FY13 and FY14 s revenues respectively. The Group also derives revenue from rental of an oil palm plantation estate in Perak and finance lease income from Macathur Wind Farm, project management fees from project management services for external projects and operation and maintenance fees from external clients, associates and joint ventures. Figure 5: Revenue breakdown (FY14) Source: Company Prospectus Cost of sales. Fuel costs accounts for more than 60% of the total cost of sales. Malakoff receives gas supply from Petronas and coal from TNB Fuel Services pursuant to supply agreements that run concurrently with its PPAs. Under the PPA terms, cost of fuel is passed on to TNB according to formulas set forth in the respective PPAs. In FY11, Malakoff adopted IC Interpretation 4 whereby its PPAs and Macathur Wind Farm Contracts are deemed containing leases. Therefore revenue from capacity payments under the PPAs is recognised on a straight-line basis over the term of the respective PPA. The amortisation of intangible asset refers to the amortisation of premium paid over the fair value of the previously-acquired power plants. Payments received from the Macathur Wind Farm contract are net of cost of expenses, therefore no cost of sales is recognised for this segment. Figure 6: Cost of sales breakdown (FY14) Source: Company Prospectus 12 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 12 of 19

13 Financial Performance. Versus FY12, Malakoff s revenue in FY13 declined by 15.6% due to lesser capacity payments of 17.8% received from Tanjung Bin Power Plant due to operational issues in 1QFY13. The Tanjung Bin Power Plant experienced a number of unscheduled outages due to the plant s operational problems. A recovery programme to rectify the issues had been completed in March 2014 and the plant was back to full capacity since then. Revenue in FY14 increased by 18.6% from FY13, mainly on improved capacity payments from Tanjung Bin Power Plant, which recorded a growth of 21.7% from FY13, a full-year contribution from Macathur Wind Farm versus six months in 2013 and consolidation of PD Power Plant revenue following full acquisition in May Figure 7: Revenue and net profit for FY11 to FY14 Source: Company Prospectus, PublicInvest Research Lower revenue recorded in FY13 dragged down operating profit to RM702.2m from RM1,237.5m in FY12. However the operating profit jumped by 81% to RM1271.4m in FY14 due to higher revenue recorded in the year. Tax incentives amounting to RM150.5m in FY13 versus tax expenses of RM156.8 in FY12 failed to cushion the impact of higher finance costs incurred in FY13, resulting in a lower net profit of RM161.5m in FY13 versus RM467.9 in FY12. However, net profit for FY14 surged more than double to RM341.5m from FY13 owing to higher revenue and 14% lower administrative expenses. Net gearing. On its balance sheet, its net gearing (borrowings net of cash over shareholders equity) as at end of FY13 and FY14 were 3.7x and 3.5x respectively. Post-IPO, we are expecting its net gearing to improve to approximately 1.8x with larger shareholders equity base and IPO cash proceeds. However, the net gearing will move up in tandem with new business ventures especially power and water production plants that require high capital expenditure. Foreign currency exposure. According to management, most of the Group s borrowings are in RM, therefore it is less sensitive to fluctuations in foreign currency exchanges. As at 31 December 2014, 87.8% of its total borrowings are RMdenominated, with approximately 10.5% in Australian Dollar and 1.6% in US Dollar. The Group has hedging instruments to manage such currency exposure arising from the foreign currency loans. Dividend Policy. Beginning 1 January 2015, Malakoff has introduced a dividend policy with a payout ratio of not less than 70% of its consolidated net profit (after minority interests). However, the dividend payment will be subject to, among others levels of cash, capital expenditure and working capital requirements and debt obligations. 13 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 13 of 19

14 Valuation and Recommendation We derive a fair value of RM2.18 based on DCF valuation. We derive a fair value of RM2.18 for Malakoff using a discounted cash flow (DCF) valuation. Key assumptions for our DCF valuation include: (i) discount rate using WACC of 7.6%; (ii) consistent and continuous capacity payments from SEV, GB3, Prai and Tanjung Bin power plants until the expiry of PPA; (iii) Tanjung Bin Energy Power Plant commencing operations in March 2016 and starting to receive capacity payments from then (iv) all power plants to run smoothly without unplanned outages (iv) PD Power Plant PPA expiring in Jan 2016 (v) Lower capacity payments from extended SEV PPA upon expiry of current PPA. We expect capacity payments from Tanjung Bin Energy Power Plant, which is scheduled to commence operations on 1 March 2016 to boost the Group s net profit by 46.6% and 29.0% for FY16 and FY17 with better net profit margin of 9.9% and 12.2% in FY16 and FY17 respectively from the current 6.1%. However, we expect the Group s earnings to decline by 22.9% in FY18 due to the fullyear effect from the lower capacity payments arising from the revised capacity rate financial (CRF) of the extended PPA. SEV s initial PPA, which was to have expired in June 2017, was extended for a 10-year period until 2027 in 2013 under the Track 2 tender for first generation IPPs. Management has confirmed there will be a huge stepdown in capacity payments and we assume the extended version will be approximately 20% from the original PPA. As the SEV power plant infrastructure cost has been paid off upon expiry of original PPAs, the extension at lower rate is still considered a bonus to the Group. Based on the assumption of a 70% payout ratio as per its dividend policy, the Group s dividend yield is estimated to be 3.1%, 4.6% and 5.9% for FY15, FY16 and FY17 respectively. However, as we estimate lower earnings in FY18, the corresponding decline in dividend yield for the year is still expected to be an attractive 4.5%, approximately. We like Malakoff for its attractive dividend yield of above 4.5% on an average basis, higher than other power players such as TNB and YTL Power which offer lower yields in the range of 2.3% 3.0%. We note that its revenue and earnings are highly dependent on the capacity payments, therefore any operational issues at any of its power plants which could lead to unplanned outages may adversely affect its future cash flows and our valuation. It is also crucial for the Group to replenish its expiring PPAs with extension or new PPAs to sustain its profitability. Key catalysts would be securing new PPAs through new projects for power and water generation plants, renewal or extension for its expiring PPAs and additional capacity in renewable energy. Table 4: Peers Comparison Market EV/EBITDA P/B P/E DY Company Cap (x) (x) (x) (%) (RM bn) FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 TNB YTL Power Ratchaburi EGCO Average Malakoff Source: PublicInvest Research, Bloomberg 14 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 14 of 19

15 SWOT Analysis Table 5: SWOT Strengths Consistent stream of revenue, backed by its long term PPAs Minimum operating risks as most power plants fixed and operating cost, as well as fuel costs are being absorbed by capacity and energy payments Well diversified fuel mix power plants with coal, gas and multi-fuel fired. Opportunities Expansion opportunities in region with increasing electricity demand growth such as emerging Asian markets and MENA region. Potential expansion in Australia s wind farm and other countries for renewable energy venture Growth in cooling water and electricity distribution business. Eyeing Tradewinds Square. Leverage on its strong operations and maintenance capabilties for power and water desalination plants Weaknesses Heavily dependable on TNB and PPAs for revenue contribution. Depends on sole distributor for fuel supply Business operations require high capital expenditure which could affect liquidity and lead to high gearing Threats Terrorist attacks and natural disasters which might affect its plants performances. Subject to various rulings and regulations across different countries. Delay in commencement of its plant operations could affect its capacity growth. Competition from other independent power producers. Key Risks Malakoff is exposed to various risks such as: Operational plant issues such as equipment breakdown which could lead to unplanned outages and which will affect the plant capacity payments. If the Group fails to deliver power for prolonged periods, it would put the Group at risk breaching its PPA contract terms and may lead TNB into terminating such contract, though this is relatively remote given Malakoff s importance to national supply. We do see hiccups however, for example the Group s total revenue in FY13 being down by 16% compared to FY12 due to operational issues at Tanjung Bin Power Plant. Natural disasters or terrorist attacks may also affect the plants performances. Disruption in fuel supply might affect the power plants ability to generate electricity and therefore could negatively affect the Group s overall financial performance. Petronas is the sole supplier for natural gas while TNB Fuel Services is the sole supplier for coal. Each power plant signed a fuel supply agreement that runs concurrently with its PPA. High dependency on the sole fuel supplier would put the Group at higher risk. Delay in Tanjung Bin Energy Power Plant s commencement of operations. Tanjung Bin Energy Power Plant is expected to commence operations on 1 March Though there was a delay in the construction progress earlier, Management has confirmed the plant s construction schedule is currently on track and there will be no delay in its commencement of operations. However, TNB s latest Manjung 4 coalfired power plant faced difficulties in starting up and delayed for 12 days recently. 15 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 15 of 19

16 Though the delay may be compensated by insurance claims, it may not enough to cover for losses of revenue. We have accounted contributions from the Tanjung Bin Energy Power Plant in our financial model. Failure to commence on schedule will affect our valuations. Unable to secure new PPA to replenish expiring PPAs. It is crucial for the Group to replenish the expiring PPAs with a new PPA to sustain the Group s profitability. The Group is exposed to other capable competitors who may have a better experience in power plant operations and able to offer better rates than Malakoff. Failure to obtain current PPAs renewal or extension. Due to reducing natural gas production in Malaysia which has led to higher gas prices and relatively cheaper coal prices, TNB may despatch more power from coal-fired power plants. With the upcoming Manjung 4 and 5 coal-fired power plants and also Malakoff s Tanjung Bin Energy, gas-fired power plants PPAs may not be considered for extension. Malakoff currently owns 4 gas-fired power plant and revenue contribution from these power plants accounted for 43.9% and 40.2% of the Group s total revenue in 2013 and 2014 respectively. Heavily dependable on TNB. Malakoff rely on TNB as the single buyer for power industry in Malaysia. TNB will also decide which power plant to despatch electricity to the nation s grid. Failure to renew IPP licence. Power industry in Malaysia and some other countries are highly regulated, therefore failure of the Group or its subsidiaries, associates and joint ventures to renew the necessary licences or documents could adversely affect the business operations. IPO Details IPO details. Malakoff s initial public offering (IPO) consists of institutional offering up to 1,279,240,000 shares and retail offering of 242,500,000 shares. The IPO of up to 1,521,740,000 shares in Malakoff comprises a public issue of 1,000,000,000 new shares and an offer for sale of up to 521,740,000 existing shares. The IPO represents approximately 30.4% of the Group s enlarged issued and paid-up capital of 5,000,000,000 shares, with institutional and retail offerings representing about 25.6% and 4.8% of the enlarged issued and paid-up share capital respectively. The institutional price was determined by book-building and the process was ended earlier than the targeted date due to overwhelming response. The final retail and institutional prices have been fixed at RM1.80 per share. According to news reports, Malakoff s institutional tranche has been oversubscribed by more than ten times while the retail portion was oversubscribed by 1.4 times, according to Bursa Malaysia announcement. Utilisation of proceeds. Malakoff will use the entire IPO proceeds of RM1.80bn to fully redeem its RM1.80bn Junior Sukuk Musharakah which was used to partly finance the privatisation of Malakoff in The Group will bear the listing expenses, estimated at RM46.8m from internally generated funds. The IPO allocation, post-ipo share capital of Malakoff and utilisation of IPO proceeds are shown in the following tables. 16 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 16 of 19

17 Table 6: IPO Allocation Categories No. of shares % of enlarged share capital upon listing Institutional offering: - Bumiputera investors approved by MITI - Other institutional and selected investors 550,000, ,240,000* Sub-total 1,279,240, Retail offering - Eligible Malakoff persons Directors and eligible employees Persons who have contributed to the success of the Group - Eligible MMC persons - Entitled MMC shareholders - Public (Bumiputera) - Public (Non-Bumiputera) 17,580, ,000 2,500,000 72,000,000 75,000,000 75,000, <0.1 < Sub-total 242,500, Total 1,521,740, Source: Company Prospectus, * inclusive of 521,740,000 Offer for Sale Table 7: Post-IPO Share Capital No. of shares Authorised 10,000,000,000 Issued and fully paid-up Issued and fully paid-up as at 17 April ,000,000,000 To be issued and fully paid-up pursuant to the Public Issue 1,000,000,000 Enlarged share capital upon listing 5,000,000,000 Source: Company Prospectus Table 8: Selling Shareholders Offer for sale Interest After IPO (2) Selling shareholder No. of shares No. of shares % of enlarged share capital (1) AOA 149,566, ,738, EPF 227,862, ,138, KWAP 75,954, ,046, SCI Asia 49,370, ,630, SEASAF 18,988,000 81,012, Total 521,740,000 Source: Company Prospectus, (1) based on Malakoff s issued and paid-up share capital of 5,000,000,000 shares (2) Assuming the over-allotment option is not exercised 17 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 17 of 19

18 KEY FINANCIAL DATA INCOME STATEMENT DATA FYE Dec (RM m) 2014A 2015F 2016F 2017F 2018F Revenue 5, , , , ,910.4 Gross Profit 1, , , , ,771.7 Operating Income 1, , , , ,279.6 Pre-tax Profit , Income Tax Effective Tax Rate (%) Minorities Net Profit Growth Revenue 19% 1% 5% 4% -5% Gross Profit 35% 0% 13% 12% -14% Net Profit 111% 17% 47% 29% -23% Source: Company Prospectus, PublicInvest Research estimates BALANCE SHEET DATA FYE Dec (RM m) 2014A 2015F 2016F 2017F 2018F Property, Plant & Equipment 14, , , , ,378.1 Cash and Cash Equivalents 3, , , , ,644.5 Trade and Other Receivables 1, , , , ,377.9 Other Assets 10, , , , ,092.5 Total Assets 29, , , , ,493.1 Trade and Other Payables , , ,030.6 Borrowings 18, , , , ,613.7 Deferred tax 2, , , , ,721.1 Other Liabilities 3, , , , ,235.4 Total Liabilities 25, , , , ,600.8 Shareholders Equity 4, , , , ,892.3 Total Equity and Liabilities 29, , , , ,493.1 Source: Company Prospectus, PublicInvest Research estimates Fiscal PER SHARE Year End DATA December & RATIOS (RM mn) 2009A 2010A 2011F 2012F 20 FYE Dec 2014A 2015F 2016F 2017F 2018F Book Value Per Share NTA Per Share EPS (Sen) DPS (Sen) Payout Ratio (%) ROA (%) ROE (%) Source: Company Pospectus, PublicInvest Research estimates 18 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 18 of 19

19 RATING CLASSIFICATION STOCKS OUTPERFORM NEUTRAL UNDERPERFORM TRADING BUY TRADING SELL NOT RATED The stock return is expected to exceed a relevant benchmark s total of 10% or higher over the next 12months. The stock return is expected to be within +/- 10% of a relevant benchmark s return over the next 12 months. The stock return is expected to be below a relevant benchmark s return by -10% over the next 12 months. The stock return is expected to exceed a relevant benchmark s return by 5% or higher over the next 3 months but the underlying fundamentals are not strong enough to warrant an Outperform call. The stock return is expected to be below a relevant benchmark s return by -5% or more over the next 3 months. The stock is not within regular research coverage. SECTOR OVERWEIGHT NEUTRAL UNDERWEIGHT The sector is expected to outperform a relevant benchmark over the next 12 months. The sector is expected to perform in line with a relevant benchmark over the next 12 months. The sector is expected to underperform a relevant benchmark over the next 12 months. DISCLAIMER This document has been prepared solely for information and private circulation only. It is for distribution under such circumstances as may be permitted by applicable law. The information contained herein is prepared from data and sources believed to be reliable at the time of issue of this document. The views/opinions expressed herein are subject to change without notice and solely reflects the personal views of the analyst(s) acting in his/her capacity as employee of Public Investment Bank Berhad ( PIVB ). PIVB does not make any guarantee, representations or warranty neither expressed or implied nor accepts any responsibility or liability as to its fairness liability adequacy, completeness or correctness of any such information and opinion contained herein. No reliance upon such statement or usage by the addressee/anyone shall give rise to any claim/liability for loss of damage against PIVB, Public Bank Berhad, its affiliates and related companies, directors, officers, connected persons/employees, associates or agents. This document is not and should not be construed or considered as an offer, recommendation, invitation or a solicitation of an offer to purchase or subscribe or sell any securities, related investments or financial instruments. Any recommendation in this document does not have regards to the specific investment objectives, financial situation, risk profile and particular needs of any specific persons who receive it. We encourage the addressee of this document to independently evaluate the merits of the information contained herein, consider their own investment objectives, financial situation, particular needs, risks and legal profiles, seek the advice of their, amongst others, tax, accounting, legal, business professionals and financial advisers before participating in any transaction in respect of any of the securities of the company(ies) covered in this document. PIVB, Public Bank Berhad, our affiliates and related companies, directors, officers, connected persons/employees, associates or agents may own or have positions in the securities of the company(ies) covered in this document or any securities related thereto and may from time to time add or dispose of, or may be materially interested in, any such securities. Further PIVB, Public Bank Berhad, our affiliates and related companies, associates or agents do and/or seek to do business with the company(ies) covered in this document and may from time to time act as market maker or have assumed an underwriting commitment in the securities of such company(ies), may sell them or buy them from customers on a principal basis, may have or intend to accommodate credit facilities or other banking services and may also perform or seek to perform investment banking, advisory or underwriting services for or relating to such company(ies) as well as solicit such investment advisory or other services from any entity mentioned in this document. The analyst(s) and associate analyst(s) principally responsible for the preparation of this document may participate in the solicitation of businesses described aforesaid and would receive compensation based upon various factors, including the quality of research, investor client feedback, stock pickings and performance of his/her recommendation and competitive factors. Hence, the addressee or any persons reviewing this document should be aware of the foregoing, amongst others, may give rise to real or potential conflicts of interest. Published and printed by: PUBLIC INVESTMENT BANK BERHAD (20027-W) 9 th Floor, Bangunan Public Bank 6, Jalan Sultan Sulaiman Kuala Lumpur T F Dealing Line Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 19 of 19