KUALA LUMPUR: The quarterly earnings contraction has exerted heavy pressures on Malakoff Bhd’s share price, which dipped to an all-time low of RM1.17 last Friday.

The country’s third largest independent power producer (IPP), in terms of capacity, is currently trading 35% below its initial public offer price of RM1.80. Malakoff was relisted on Bursa Malaysia in May 2015.

Malakoff’s share price has been on downhill since October last year after it had hovered at around RM1.60 most part of the year. This is rather a contrast to the traditional belief that utilities companies, such as IPP, is one that investors would want to seek shelter when economic weather turns harsh simply because of clear earnings visibility and resilience in nature.

The current share price sits 18% below the consensus’ 12-month target price of RM1.43, which is based on estimates by 18 out of 20 analysts. Does this make the stock an attractive pick?

Some analysts concur that the stock starts appearing attractive, in terms of valuation, after the recent fall. Still, not every analyst is quick to recommend it yet.

“If you look broadly, most of [Malakoff’s] peers — TNB (Tenaga Nasional Bhd), Petronas Gas Bhd and Gas Malaysia Bhd — have been showing better, if not more stable, earnings,” an analyst told The Edge Financial Daily.

Malakoff announced last week that its net profit shrank 15% to RM90.23 million, or 1.8 sen a share, for the fourth quarter ended Dec 31, 2016 (4QFY16) against RM106.17 million or 2.12 sen per share, a year ago.

The IPP has warned in the result note that the power purchase agreement (PPA) for the Segari Energy Venture (SEV) power plant would expire in June. The PPA is the sweetheart deal for Malakoff given the favourable terms, including the take or pay clause, in the agreement.

The expiry has weighed on its earnings prospects, and on top of that the IPP has not been able to secure new project so far.

Although it signed a new 10-year PPA for the power plant, analysts who track the stock have cut Malakoff’s earnings estimates for the financial year ending Dec 31, 2018 (FY18) and FY19 amid expectation of reductions in capacity payments under the new PPA.

Kenanga Research, which forecasts a 50% decline in capacity payments, slashes its earnings forecast for FY18 by 23%.

Meanwhile, earnings contribution from its Tanjung Bin power plant, which commenced operations in March 2016, is expected to be minimal despite management guidance that the plant will turn profitable within this year, said CIMB Research analyst Saw Xiao Jun.

With an effective capacity of 1,890mw, Tanjung Bin is currently Malakoff’s biggest power plant followed by the SEV plant with an effective capacity of 1,221.6mw.

“There is a possibility of lower capacity payment for Tanjung Bin in FY17 given that [it] has breached its second threshold for unscheduled outage rate of 8%,” said TA analyst Kylie Chan.

Chan projected that gains from the coal-fired plant would be offset by higher downtime scheduled in March for rectification works, and higher interest costs of the plant following debt refinancing, among others.

“In addition, management guided for higher total scheduled outage in FY17,” she wrote in the latest financial result review.

The weak earnings may make Malakoff less generous on dividend payment. It declares a dividend of seven sen per share for FY16, which translates into 98.5% of its annual earnings per share of 7.11 sen.

Malakoff currently boasts a 12-month dividend yield of 4.55%; it is almost two times the 2.37% dividend yield of TNB.

However, assuming the share price remains constant, it faces limited upside as earnings visibility remains weak.

“If they maintain the [dividend payout ratio] at 70% to 80%, it will be a concern to investors [since the] management expects earnings in FY17 and FY18 to be lower,” said an analyst who declined to be named.

It was likely, however, that Malakoff would at least try to maintain the seven sen per share dividend, she told The Edge Financial Daily over the phone.

“The company said that it wants to continue to grow its capacity, so it has to make a choice — [they have to find] a balance between the need to finance new expansion and maintain the dividend,” Saw said.

That said, some quarters observe that investors’ risk appetite has grown of late. Apart from having TNB as a staple in their portfolio given it is a component stock of the benchmark FBM KLCI, investors may not be counting energy producers among their top picks when the economic growth prospects get brighter.