Investment Highlights

• We maintain HOLD on Malakoff with a lower DCF-based fair value of RM0.65/share vs. RM0.70/share previously (WACC: 7.5%). We ascribe a 3-star ESG rating to Malakoff.

• In spite of a weak set of results, Malakoff declared an interim gross DPS of 1.5 sen in 2QFY23 (2QFY22: 2.8 sen). We forecast a gross DPS of 3 sen for FY23E (FY22: 5.3 sen), which implies a yield of 4.7%.

• Malakoff’s 1HFY23 core net profit was below our forecast and consensus estimates. Malakoff recorded a net loss of RM394.4mil in 1HFY23 compared to our net profit estimate of RM94mil and consensus’ expectations of RM177.6mil for the full year.

• The group fell short of our expectations as fuel margin losses widened in 2QFY23. Malakoff recorded a larger negative fuel margin of RM571.1mil in 2QFY23 vs. RM109mil in 1QFY23. To account for this, we are now forecasting a net loss of RM48mil for Malakoff in FY23E instead of a net profit of RM94mil.

• Going forward, we believe that the fuel margin would turn positive as coal prices have plateaued since 2QFY23. Hence, Malakoff’s net profit is expected to improve in 2HFY23.

• Malakoff swung into a net loss of RM394.4mil in 1HFY23 from a net profit of RM182.3mil in 1HFY22. Malakoff was in the red in 1HFY23 due to a negative fuel margin of RM680.1mil. In contrast, Malakoff benefited from a positive fuel margin of RM62mil in 1HFY22 as coal prices rose. Comparing 2QFY23 against 1QFY23, Malakoff’s net loss widened to RM318.7mil from RM75.7mil.

• On a positive note, Malakoff’s revenue expanded by 10.7% YoY to RM4.7bil in 1HFY23, underpinned by higher capacity payments. Capacity payments improved in 1HFY23 as TBE stabilised. Recall that TBE was affected by forced outages from November 2021 to February 2022.

• Alam Flora’s net profit eased to RM58.4mil in 1HFY23 from RM62.5mil in 1HFY22. Net profit margin slipped to 1.5% in 1HFY23 from 14.6% in 1HFY22. We attribute the decline in Alam Flora’s earnings to higher fleet costs.

• Malakoff is currently trading at a fair FY24F PE of 12x, which is close to its 2-year average of 14x.

Source: AmInvest Research - 29 Aug 2023