Investment Highlights

• We maintain HOLD on Malakoff with an unchanged DCFbased fair value of RM0.65/share (WACC: 7.5%). We ascribe a neutral 3-star ESG rating to Malakoff.

• Here are the key takeaways from Malakoff’s briefing yesterday: -
  • The negative fuel margin can partly be attributed to the high cost of coal inventory in Malakoff’s books. If the drawdown of the coal inventory is slow due to weak electricity demand, Malakoff would be holding high cost inventory for a longer time.
  • Malakoff reckons that it would be able to use up the coal inventory in FY23E. Hence, fuel margin is expected to turn positive either in 3QFY23 or 4QFY23. The group orders its coal supplies in accordance with the power purchase agreement (PPA) with Tenaga Nasional. Based on the guidelines, Malakoff has to hold at least 1 month of coal inventory.
  • Alam Flora’s net profit declined by 6.6% YoY to RM58.4mil due to a 10% drop in the volume of waste handled in the non-concession segment. The fall in the tonnage of waste handled can be attributed to the expiry of a contract with the government. The volume of waste handled in the non-concession segment fell to 413,300 tonnes in 1HFY23 from 459,400 tonnes in 1HFY22.
  • Malakoff would be bidding for the unallocated capacity under CGPP (Corporate Green Power Programme). If successful, Malakoff would be selling green energy to sister companies such as DRB-Hicom. Recall that there are 237MW, which have not been allocated yet.
• Malakoff is currently trading at a FY24F PE of 11x, which is lower than its 2-year average of 14x. We believe that the discount is justified due to Malakoff’s risk of negative fuel margin.

Source: AmInvest Research - 30 Aug 2023