Investment Highlights

• We maintain BUY on Malakoff with a lower DCF-based fair value of RM0.81/share (vs. RM0.87/share previously) with a WACC of 7.5%. This stems from a reduction in Malakoff’s FY23F net profit by 8% to account for a weaker fuel margin resulting from the fall in coal and gas costs.

• Apart from a decline in fuel margin, Malakoff’s core net profit is expected to drop in FY23F due to the expiry of GB3’s PPA in December 2022. We have already accounted for this in Malakoff’s earnings forecast. The GB3 gas power plant (640MW) accounted for 11% of Malakoff’s capacity payments in FY22.

• Malakoff is exploring the potential sale of GB3 assets. The group is currently looking for prospective buyers. GB3’s residual value stood at RM90mil as at end-FY21.

• On a positive note, planned outages are expected to be minimal in FY23F. Recall that the TBE power plant experienced more than 30 days of planned outages in FY22. TBE’s operations have stabilised after the replacement of turbine blades in October 2022. Also, TBE’s UOR (unplanned outage rate) has fallen below 10% as at February from more than 20% in early-FY22.

• We reckon that Alam Flora’s net profit would improve to RM120mil in FY23F after being hit by higher cost of fleet maintenance in FY22. The volume of waste managed (concession) is estimated to rise by 3% to 1.2mil tonnes in FY23F.

• Malakoff is expected to secure more solar rooftop projects in FY23F. However, we do not envisage earnings contribution to be significant as the size of the projects is small. So far, Malakoff has commissioned 23MW solar rooftop projects. Malakoff’s effective generating capacity is 5,342MW in total.

• We believe that Malakoff should be able to sustain its dividend payments. The group’s dividend payouts have exceeded 80% every year since FY16. We forecast a gross DPS of 5 sen for FY23F, which implies a decent yield of 7.3%.

• Malakoff is currently trading at a FY23F PE of 9x, which is below its 2-year average of 14x.

Source: AmInvest Research - 4 Apr 2023