Analysis of Malakoff Corporation Bhd

Dear Readers

Let’s jump right into Malakoff Corporation Bhd (“Malakoff“).

Introduction

Malakoff is an independent power and water producer. Its businesses consist of the generation of power (in the form of electricity) and desalination of water (a process of removing salts and minerals from saline water).

The main bulk of Malakoff’s business is in Malaysia where it has a capacity to generate, from burning gas, oil and coal, about 6,346 megawatts/MW of electricity (that’s about 6.3 million watts).

On the international stage, Malakoff has a capacity of producing 690MW of electricity and a desalination capacity of 444,800 m3/day of water from assets in Australia (windmill farm), Saudi Arabia (water desalination and power), Bahrain (water desalination), Oman (water desalination) and Algeria (water desalination).

Malakoff has a simple business model. From the assets which it owns (in full) or co-owns, Malakoff generates power or desalinates water which they sell to  national grids or water utility companies.

Malakoff TBE (3) (800x533)
Malakoff’s Tanjung Bin power plant with all the bells and whistles of a modern power plant
Financials

To dissect the financials of Malakoff, I have prepared a simple table in which I only considered Malakoff’s financials since its initial public offering in 2015.

DATA 2016 2015
REVENUE (RM’000) 6098420 5301987
PROFIT (RM’000) 355463 453234
OPERATING PROFIT (RM’000) 1439370 1308858
SHAREHOLDERS’ EQUITY (RM’000) 5915712 5803550
DEBT (RM’000) 25099070 24354038

RATIOS

DEBT TO EQUITY RATIO 4.24 4.19
OPERATING PROFIT MARGIN 0.23 0.24
OCF RATIO 0.75 1.10
PROFIT MARGIN 0.05 0.08
EPS (CENTS) 7.1 10
EPS (ADJUSTED) CENTS 7.1 9.04
DPS CENTS 7.0 7.0
DIVIDEND PAY OUT (%) 0.98 0.70
P/E 19.3 16
ROE 6.03 8.62

What strikes me the most is Malakoff’s high debt to equity ratio (~4.2). That comes without surprise as Malakoff is in an infrastructure business which requires a lot of capital expenditure. I am of a personal opinion that Malakoff’s debts would not a constraining factor because of its fair cash flow.

Malakoff’s debts (secured long term debts and by issuance of bonds) are mainly in RM (86%), AUD (12%) and USD (2%). Foreign currency denominated debts are small thus posing negligible exchange rate exposure.

Malakoff’s profit margin is slim (to the tune of 5-8%). Again, that is unsurprising as it is in a wholesale business to selling power and desalinated water.

Even though revenue has seen an increase of about 15% from FY2015 to FY2016, what raises eyebrows is the decline of its earnings. According to Malakoff, its earnings were negatively impacted because of the change in the estimation of the residual values of its gas-fired power plants (remaining value of an asset after it has been fully depreciated) and a reduced tariff of an extended power purchase agreement for its Port Dickson power plant (selling power at a lower tariff).

Potentials

The initial public offering share price of Malakoff, in 2015, was RM1.80. Malakoff’s share price, at the time of writing, is RM1.22. That is in tandem with the decreased earnings in FY2016. On the bright side, there is definitely a discount of  32%.

Malakoff is embarking on an ambitious plan to acquire at least 10 power producing brownfield assets (existing assets which can be remodeled or modified) with the hope of achieving a 10,000MW power-production and 530,000 m3/day of water desalination capacity by 2020. It is looking at the European or Australian market.

EDIT: It appears that there are two conflicting reports from 2 different news portals as to whether Malakoff is considering 10 opportunities or at least 10 assets for purchase. My appreciation to rooney8 for pointing out the discrepancies. The links to the 2 different news portals are listed below:

  1. http://www.thestar.com.my/business/business-news/2017/04/19/malakoff-looks-at-buying-10-power-generation-assets/
  2. http://www.theedgemarkets.com/article/malakoff-focus-international-market

Such feat is ambitious noting that Malakoff’s current assets of RM30 billion are only producing about 7,500MW and 444,800 m3/day of desalinated water.

Conclusion

In my opinion, the attractive points concerning Malakoff are:

  1. the 32% discount on its share price from its listing price; and
  2. that it adheres, at least for now, to its dividend distribution policy of distributing at least 70% of its profit to shareholders.

If all things being equal next year, a dividend of 7 sen per share would translate into a dividend yield of 5.7% @ RM1.22 per share. This is every dividend portfolio’s wet dream.

If you are have a long-term investment horizon, Malakoff may look like an attractive proposition as any downside would be minimal as opposed to a potential upside albeit gradual.

Disclosure

I do not own Malakoff’s shares.

References:

  1. http://www.nst.com.my/business/2017/04/231906/malakoff-profits-ease-despite-higher-revenue
  2. http://www.thestar.com.my/business/business-news/2017/04/19/malakoff-looks-at-buying-10-power-generation-assets/
  3. http://www.theedgemarkets.com/article/malakoff-focus-international-market
  4. https://markets.ft.com/data/equities/tearsheet/summary?s=MALAKOF:KLS
  5. FY2016 Annual Report

Analysis of Elsoft Research Bhd

Introduction

Elsoft Research Bhd (“ELSOFT“) is in the business of research, design and development of test and burn-in systems and application for semiconductors. In simple terms, ELSOFT is in the business of designing and producing automated test equipment (“ATE“) to test a semiconductor-based product.

Business segments

The growth engine of ELSOFT lies in two major segments: automotive and smartphone segments.

led-daytime-running-lights_100184374_m
Daylight running lights

In the automotive segment, ELSOFT develops ATE which tests daylight running lights, LED headlamps and rear-end signature lighting for branded cars.

In the smartphone segment, ELSOFT develops ATE which tests the LED component of a smartphone.

Financials

I have designed a basis template of ELSOFT’s financials from FY2011 to FY2016.

DATA 2016* 2015 2014 2013 2012 2011
REVENUE (RM’000) 63613 49741 45143 25218 18758 12653
PROFIT (RM’000) 31186 26045 20133 10823 6620 4938
OPERATING PROFIT (RM’000) N/A 26313 19576 10434 6585 4349
SHAREHOLDERS’ EQUITY (RM’000) 98303 83258 73585 60728 55351 50550
DEBT (RM’000) 13327 9843 7675 4350 5125 5724
RATIO
DEBT TO EQUITY 0.13 0.11 0.10 0.07 0.09 0.11
OPERATING PROFIT MARGIN N/A 0.52 0.43 0.41 0.35 0.34
OCF RATIO 2.51 1.915 1.954 2.842 1.002 0.553
PROFIT MARGIN 0.49 0.52 0.44 0.42 0.35 0.39
EPS (CENTS) 11.5 9.6 11.1 6.0 3.7 2.7
EPS (ADJUSTED) CENTS 11.4 9.6 7.4 3.9 2.4 1.8
DPS (CENTS) 10 8 7 3 2 2
DIVIDEND PAY OUT 0.86 0.55 0.63 0.5 0.54 0.74
P/E 14.37 13.43 16.10 11.29 10.14 15.38
ROE 31 31 27 18 12 9

Note: * FY2016 is unaudited

From my calculations, the compounded growth rate of the company, between FY2011 to FY2016, is a whopping 36%. Notably, ELSOFT’s profit margin is strong, between a range of 40-50%. This indicates that the company is not in a price competitive industry and/or its products have a competitive edge over similar products in the market.

ELSOFT’s customer base is from Malaysia (~90%), China (~7.8%) and Taiwan (~2.25%).

The automotive segment contributes close to 50% of ELSOFT’s revenue whilst the smartphone segment contributes a respectable 37%. General lighting contributes 13%.

Potentials

Through its R&D, ELSOFT has developed two new products:

  1. next generation test and burn-in solution for the automotive and general lighting segments; and
  2. ATE for solar cells.

This would be, I believe, ELSOFT’s first foray into the solar cell segment.

ELSOFT intends to enter into the medical devices market to develop control boards or embedded control systems for kidney dialysis machines. This will start as soon as ELSOFT obtains an European quality certification for medical devices.

For the 1st quarter of FY2017 (until 31 March 2017), it has a book order of RM27 million already. To the contrary, book order for the 1st quarter of FY2016 was RM21.5 million and a full year’s (FY2016) book order stood at RM49 million.

Conclusion

I like ELSOFT for the following reasons:

  1. High profit margin.
  2. Strong growth rate.
  3. Strong R&D.
  4. Low debts.
  5. Strong cash flow.
  6. Anticipated growth in the semiconductor industry in FY2017.
  7. 40% dividend payout policy.
  8. There are still value in its shares despite a 1-year increase of 71%.

I dislike ELSOFT for:

  1. Reliance on R&D.
  2. 90% of its customer base is in Malaysia.
Disclose

I own shares in ELSOFT and will continue to acquire more of ELSOFT’s shares.

References:

  1. http://www.theedgemarkets.com/my/article/elsoft-expands-business-new-segments-and-products
  2. http://www.readitquik.com/news/allied/worldwide-semiconductor-industry-to-soar-in-2017/
  3. https://www.zacks.com/commentary/100510/semiconductor-industry-outlook—january-2017
  4. http://www.theedgemarkets.com/my/article/facing-challenges-semiconductor-merger-mania
  5. https://markets.ft.com/data/equities/tearsheet/financials?s=ELSOFT:KLS