Investment Highlights

• We upgrade Malakoff to BUY from HOLD with a higher DCF-based fair value of RM0.75/share vs. RM0.65/share previously (WACC: 7.5%). We have rolled forward our DCF base year to FY24F. Also, we believe that Malakoff’sFY24F net profit would normalise to RM200mil-RM300mil as fuel margin improves on the back of stable coal prices. We ascribe a 3-star ESG rating to Malakoff.

• We visited Malakoff’s TBP (Tanjung Bin Power) plant in Johor last week. Here are the key takeaways from the site visit: -
  • We believe that Malakoff’s net profit will recover in 4QFY23 after a net loss of RM394.4mil in 1HFY23. Fuel margin is expected to turn positive in 4QFY23 as Malakoff fully draws down its high-cost coal inventory by 3QFY23. We reckon that fuel margin would still be negative in 3QFY23 although at a smaller magnitude compared to RM450mil in 2QFY23. Recall that Malakoff’s fuel margin losses were RM557mil YoY in 1HFY23.
  • The negative fuel margin affected mainly the TBP plant. This is because TBP uses a significant amount of bituminous coal and the fall in the price of bituminous coal was sharper than sub-bituminous coal in 1HFY23. 70% of TBP’s coal is bituminous while the balance 30% sub-bituminous.
  • In contrast, TBE uses 100% sub-bituminous coal, which was not as volatile as bituminous coal. Sub-bituminous coal has lower sulphur but higher moisture content compared to bituminous coal.
  • Malakoff plans to start co-firing the TBP plant with biomass in FY24F. The pilot project will involve using biomass at 3%-5% of feedstock per generating unit. Malakoff plans to scale up the mix to 15% of capacity by FY27F. Malakoff is currently discussing with TNB Fuels on the cost pass-through mechanism for biomass.
  • Going forward, Malakoff plans to participate in more RE projects. The group has sizeable landbank and sites for solar power plants and the redevelopment of power plants. There is potential for up to 124MW of solar power plants. Presently, Malakoff has a portfolio of 40MW of solar projects.
• Malakoff is currently trading at an attractive FY24F PE of 11x, which is lower than its 2-year average of 14x. FY24F dividend yield is also compelling at 8%.

Source: AmInvest Research - 26 Sept 2023