MMC Corporation Malakoff acquires sub-utility, Hicom Power

News   MMC announced that its 51% subsidiary, Malakoff through Sterling Asia had entered into a conditional asset sale agreement with Hicom Power to acquire the assets and liabilities of the latter for a price consideration of RM575m. Hicom Power is a wholly owned subsidiary of DRB Hicom (Not Rated), which is an O&M operator for Tg. Bin’s power plant.

Comments   We are neutral to slightly negative on this acquisition. We do not see any material impacts (cost savings) from this acquisition to Tg. Bin’s operation and the financing of the acquisition will definitely increase MMC’s net gearing from 2.1x to 2.2x (based on 80:20 debts to equity ratio). MMC will have to fork out about RM59m for the equity portion, which we think will be easily funded by its current operating cash flow.

Hicom Power is an O&M operator for Malakoff’s Tg.Bin power plant and is wholly owned by DRB Hicom (Not Rated). DRB’s cost of investment in Hicom Power was at RM295m in 2008 via the issuance of new shares in DRB then. Hicom Power holds a 25-year O&M concession for the Tg. Bin power plant, which expires in March 2032. For the past three years, Hikom Power’s revenue grew from RM285m (FY March 10) to RM312m (FY March 12) with pre-tax margin hovering around 15% to 25% (see table 1 next page).

Fair valuation? The price tag of RM575m is based on Hicom Power’s discounted free cash flow for its recurring income in the next 20 years (WACC at 10%). Based on our numbers, Hicom Power’s income accounts for 7% to 8% of Tg. Bin’s power sales, which is also dependent on the utilisation rate of the plant. However, the price tag appears to be rich, which translated into c. 9.6x of Hicom Power’s book value or at a 94% premium to DRB’s initial investment (RM295m).

Outlook   We expect MMC will be actively looking for new assets as it is progressively reducing its stake in its subsidiaries like Gas Malaysia (OP, TP: RM2.79) and Malakoff from their upcoming listings. KTMB’s privatisation could potentially be one of its new assets.

Forecast   No changes to our forecasts.

Rating   Downgrade to MARKET PERFORM

Valuation   We are downgrading our recommendation from OUTPERFORM to MARKET PERFORM due to the limited upside to our TP and the lack of immediate catalysts due to the election risk.

Risks   No change in our Target Price of RM2.80, based on SOP valuation.

Delays in MRT construction works.

Source: Kenanga