KUALA LUMPUR (Oct 30): Malakoff Corp Bhd's acquisition of a 49% equity stake in solid waste management company E-Idaman Sdn Bhd for RM133.2 million is expected to contribute 3% to 5% of the group's earnings for the financial year ended Dec 31, 2024 (FY2024), analysts said.

The acquisition is deemed reasonable, in comparison with the valuation imposed by Malakoff on the purchase of its first waste management unit Alam Flora Sdn Bhd in 2019, the analysts who published notes on the purchase on Monday said.

However, they kept their calls, target prices and ESG ratings on Malakoff unchanged on the news.

In a note, CGS-CIMB said it was upbeat on the deal as it will further strengthen the group's waste management and environmental solutions segment.

“Assuming all else remains equal, profit levels hold and taking into account loss of interest income, we estimate incremental earnings of around RM9 million for Malakoff from the proposed 49% associate stake, potentially enhancing overall group 2024 PAT by around 4%,” it said.

Kenanga Research, separately, sees the acquisition boosting FY2024 earnings by circa 5%, and Malakoff’s sum-of-parts valuation by two sen a share.

While net gearing could rise to 1.46 times, from 1.43 times at end-June, Kenanga said this is “still manageable”.

Malakoff, it said, currently has a concession to provide solid waste management services in Kuala Lumpur, Putrajaya and Pahang, via Alam Flora, which expires in 2033.

E-Idaman, meanwhile, has a concession to offer such services in Kedah and Perlis which also expires in 2033.

Alam Flora handles around 3,200 tonnes of solid waste daily while E-Idaman handles about 1,450 tonnes per day, while also running public cleaning services, the note said.

"More importantly, this latest deal speaks for Malakoff's efforts in looking for new earnings streams to replace its expiring PPAs.

“Two of its power plants had already expired recently, ie, the 436MW Port Dickson Power Plant in Feb 2019 and 640MW GB3 Power Plant [in Lumut, Perak] in Dec 2022.

“In addition, the PPA of its 350MW Prai Power Plant will expire in 2024, 1,303MW SEV Power Plant [in Lumut, Perak] in 2027 and 40%-owned Kapar Power Plant [in Selangor] in 2029," said Kenanga Research.

Meanwhile, TA Securities “expects the acquisition to be immediately earnings accretive and provides earnings growth opportunity for the group in the northern region of Malaysia”

"Additionally, the move is a continuation of Malakoff's transformation with portfolio diversification that integrates environmental services to achieve zero waste circular economy," it said.

“Assuming that E-Idaman obtains extension in concession agreement for the waste management in Kedah and Perlis, our estimate shows that E-Idaman will contribute an additional 3.4%-3.7% to Malakoff's FY2023-FY2025 earnings per share." it said.

However, it believed that the acquisition is on the high side, since Malakoff is not obtaining a controlling stake, as compared to its acquisition of a 97.37% stake in Alam Flora then.

It also noted the lack of details on Malakoff’s statement, alluding to significant revenue increase for E-Idaman moving forward.

On the other hand, AmInvestment Bank does not expect earnings contribution from E-Idaman to be significant.

"E-Idaman is estimated to increase Malakoff’s net profit by only 3% in FY2024F. As Malakoff’s stake is only 49%, the group would only equity-account E-Idaman’s net profit," it said.

Analysts, who wrote about the stock, valued the acquisition at between 9.6-10 times price-to-earnings (PE), compared with Malakoff’s RM869 million acquisition in Alam Flora, which valued the latter at around 8.7-10 times PE.

CGS-CIMB maintained its “add” rating on Malakoff with a discounted cash flow-based target price of 80 sen.

"While 1H2023 earnings were disappointing due to the negative fuel margins realised, we expect earnings and, in turn, cash flows to show improvements in subsequent quarters on the back of more stable coal prices," it said.

Meanwhile, Kenanga Research kept its “market perform” call at an unchanged SOP-derived target price of 63 sen. "The stock is supported by a decent dividend yield of >5%. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us," it said.

TA Securities also kept its “buy” rating on Malakoff with an unchanged SOP-derived target price of 67 sen a share, while AmInvestment Bank likewise maintained its “buy” rating with a discounted cash flow-based fair value of 75 sen a share.

"Malakoff is currently trading at a FY2024F PE of 11 times, which is below its two-year average of 14 times. We ascribe a neutral 3-star ESG rating to Malakoff," it said.

At noon break, Malakoff was down one sen or 1.67% to 59 sen for a market capitalisation of RM2.95 billion. Year-to-date, the stock has declined 9.23%.