Alam Flora A Boon To The Group
Alam Flora is a key earnings driver for the group as Malakoff’s Tanjung Bin Energy
(TBE) awaits new turbine blades in 2H22. Alam Flora will continue to perform well
driven by higher waste collection, opex efficiency and growth in non-concession
businesses. A tariff hike is a key re-rating catalyst as Alam Flora continues to exceed
management’s expectation. The stock offers a generous dividend yield of 8% and
trades at -2SD below its mean valuation. Maintain BUY. Target price: RM1.05.
WHAT’S NEW
• Strong Alam Flora performance… We gathered from a recent meeting that wholly-owned
Alam Flora will continue to perform well in 2022. Key earning drivers are: a) higher waste
collection with the reopening of economic activities, b) opex efficiency, and c) expansion of
the non-concession businesses including industrial collection of solid waste, integrated
facilities management, public cleansing and the management of landfills. The nonconcession businesses accounts for 10-15% of Alam Flora’s top-line and experienced
double-digit growth in the past two years, albeit from a low base.
• …has exceeded expectations… Alam Flora accounts for 35% of Malakoff Corporation’s
(Malakoff) 2021 core net profit. To recap, Alam Flora’s performance has exceeded
management’s guidence with 2021 core net profit growing 75% yoy to RM113m (vs our
expectation of sustainable net profit of RM70-80m annually). Last year’s strong performance
reflects opex efficiency initiatives (including fleet management and centralised procurement)
as well as other cost savings. A key re-rating catalyst for the stock includes a potentail (long
overdue) tariff hike for Alam Flora.
STOCK IMPACT
• …and will help to cushion TBE’s weak 1H22. We expect the strong performance of Alam
Flora and moderately higher gas usage of Malakoff’s power plants (since 4Q21, there is
higher offtake from gas fired power plants due to high coal prices) to help offset yoy weak
TBE earnings. This is due to significant reduction in TBE availability factor (37% in 4Q21 vs
100% in 3Q21) resulting from turbine blade damage. The situation was rectified on 14 Feb
22, adversely impacting 1Q22 earnings.
• We expect a stronger 2H22 on the back of a recovery in TBE with the delivery of turbine
blades in 2H22. Additionally, with the fully impairment of 40%-associate stake in Kapar
Energy Venture (KEV), Malakoff expects its overseas associate earnings to be encouraging.
2021 associate earnings rose 14% yoy on better operating matrix.
EARNINGS REVISION/RISK
• No change to earnings.
VALUATION/RECOMMENDATION
• Maintain BUY with a DCF-based target price of RM1.05. The stock trades at an attractive
single digit PE of 10x vs five-year average PE of 13x. This is 2SD below the stock’s mean
PER valuation in the past five years. We see positive risk-reward returns for the stock as
downside is largely priced-in.
• The stock offers a generous 8-9% dividend yield and the better-than-expected
performance of Alam Flora will also imply higher dividend payout to the group. We
understand Alam Flora have been flowing dividends up to the group in the past two years.
SHARE PRICE CATALYST
• Repowering/new power plant (gas) contract wins in Peninsular Malaysia as the government
seeks to pump-prime the economy by offering new power purchase agreements (PPA).
• Alam Flora’s impending tariff hike and new concession areas.
• Winning large-scale solar power tenders within Peninsular Malaysia.