Investment Highlights

• We maintain HOLD on Malakoff with an unchanged DCFbased fair value of RM0.70/share (WACC: 7.5%), implying a FY24F PE of 13x. We ascribe a 3-star ESG rating to Malakoff.

• Malakoff’s 2QFY23 earnings are envisaged to be unexciting. Fuel margin is expected to remain negative as coal prices have declined by 22% from end-1QFY23 to end- 2QFY23. However, we believe that fuel margin losses in 2QFY23 would not be as large as RM109mil in 1QFY23. This is because the 22% fall in coal price in 2QFY23 was smaller than a 51% plunge in 1QFY23.

• We anticipate a better 3QFY23 as coal prices have plateaued. Since dropping to a low of US$131/tonne on 1 June, coal prices have been hovering between US$130/tonne and US$150/tonne. According to Bloomberg, consensus is forecasting an average coal price of US$170/tonne for 2023E (1H2023: US$200/tonne) vs. US$346/tonne in 2022.

• Malakoff is focusing on rooftop solar projects. The group has been awarded 11MWp of new rooftop solar projects to date. Presently, Malakoff has a portfolio of 40MW of solar projects comprising 14MW (effective capacity) of LSS projects and 26MW of solar rooftop jobs. Although earnings from the solar projects are insignificant due to their small size, we view them positively as Malakoff would be able to gradually reduce its exposure to coal.

• TBE has stabilised after being affected by forced outages last year. TBE’s unplanned outage rate (UOR) is below 10% currently. TBE recorded an EAF (equivalent availability factor) of 92% in 1QFY23 vs. 50% in 1QFY22. TBE made up 30% of Malakoff’s capacity payments in 1QFY23 while TBP accounted for a larger 53%.

• Malakoff is looking for a buyer for the GB3 power plant, which expired at the end of FY22. GB3’s residual value stood at RM90mil as at end-FY22. Recall that Malakoff sold PD Power’s gas turbines and generators to Pacific Energy Company, Nigeria for RM73.3mil in FY21. PD Power’s PPA expired in FY19.

• Malakoff is currently trading at a FY24E of 11x, which is lower than its 2-year average of 14x. However, FY23F dividend yield is unattractive at 2.5%.

Source: AmInvest Research - 24 Jul 2023