KUALA LUMPUR: CGS-CIMB Research views Malakoff's proposal to acquire a 49 per cent stake in E-Idaman for RM133 million positively, as it will strengthen the company's position in waste management services in addition to being earnings-accretive.
The acquisition will give Malakoff exposure to waste management services in Perlis and Kedah.
"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 49 per cent associate stake, potentially enhancing overall group 2024 net profit by 4 per cent," CGS-CIMB Research said in a note.
Last week, Malakoff signed a conditional sale and purchase agreement with Metacorp Bhd to acquire a 49 per cent stake in E-Idaman Sdn Bhd for RM133 million.
According to the agreement, any upward or downward adjustment to the purchase consideration should not exceed 5 per cent.
The balance 51 per cent shareholding is held by Cenviro Sdn Bhd, a majority-owned investee company of Khazanah Nasional Bhd and SK Ecoplant Co Ltd as a shareholding partner.
Malakoff expects the acquisition to be completed within six months.
E-Idaman is involved in collecting and disposing of municipal waste under a 22-year concession granted by the government in September 2011 for solid waste collection and public cleansing management services in Kedah and Perlis.
With more than 170 solid waste collection vehicles, E-Idaman can handle an average of 1,450 tonnes per day of solid waste across 350,000 premises, in addition to running public cleaning services.
"In 2022, E-Idaman registered a revenue and net profit of RM293 million and RM28 million, respectively, implying an acquisition multiple of 9.6x price-to-earnings (P/E) ratio, which we find reasonable for a concession-type asset with a remaining 10-year tenure.
"That said, E-Idaman is expected to record a significant increase in revenues, according to the announcement. However, no details were provided for this," CGS-CIMB Research noted.
The research firm said that apart from the earnings accretion, it views the deal positively as it further strengthens its waste management and environmental solutions segments.
Currently, Malakoff owns the concession to provide solid waste management services in Kuala Lumpur, Putrajaya and Pahang, handling about 3,200 tonnes per day.
"We have an Add rating on Malakoff with a target price of RM0.80.
While the first half (1H) of 2023 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," CGS-CIMB Research said.
Key re-rating catalysts include earnings-accretive renewable energy (RE) capacity expansion and a recovery in dividends going into 2024.
Downside risks are negative fuel margins remaining persistently high and unplanned plant outages.