Malakoff’s financial results revealed another negative surprise, as its core net loss widened to RM318.7m in 2QFY23 from core net loss of RM75.7m in 1QFY23. The Group recorded a significant negative gross margin of RM300m in 2QFY23 from positive gross margin of RM123m in 1QFY23. Cumulatively, it reported core net loss of RM394.4m in 1HFY23 from RM182m core net profit in 1HFY22, missing our and consensus estimates of full year core net profit of RM113.1m and RM189.9m respectively. As we had mentioned previously, the negative fuel margin was to have spilled over into 2QFY23, though unexpectedly widening its losses. While coal prices have stabilised, we anticipate that the negative fuel margin would prolong until 4QFY23 due to timing mismatches between Moving Average Price (MAP) of coal stock against Applicable Coal Price (ACP). On this note, we forecast a net loss of RM612.5m in FY23F and cut FY24F/25F forecast by -9.0%/ -6.6%. We downgrade our call to Neutral with a lower DCF-based TP of RM0.70 (from RM0.95). Despite the net loss, it declared 1.5sen interim dividend.

• Significant negative fuel margin. In 1HFY23, Malakoff recorded higher revenue by 10.7% YoY on the back of higher energy payment (higher ACP) and capacity income. Despite that, both Tanjung Bin Power (TBP) and Tanjung Bin Energy (TBE) suffered negative fuel margins of RM556.2m and RM14.9m respectively. The bottomline was also impacted by the absence of contribution from G3 power plant following the expiry of power purchase agreement (PPA) at the end of December 2022.

• Ample cash reserve to support its requirements. Although the net loss is significant, Malakoff still recorded a positive EBITDA of RM208.5m in 1HFY23. This will be sufficient to support its core operational requirements. It also currently has an ample cash reserve of RM1.4bn, which we believe is sufficient to support capex and financing requirement as well as dividend commitment while going through this near-term headwind. The Group declared a 1.5sen interim dividend despite its net loss position.

• Challenges remain in 2HFY23. TNB Fuel (TNBF) is the sole coal supplier for domestic power plants, in which both TBP and TBE combined represent ~20% of TNBF’s coal demand. Based on guidance given from TNB, the negative fuel margin is anticipated to prolong until 4QFY23, though with narrower negative margins. This is due to timing mismatches between Moving Average Price (MAP) of coal stock against Applicable Coal Price (ACP) as ACP tracks coal futures price faster. As such, we expect Malakoff will remain in a net loss position for the remaining FY23. Nevertheless, we also expect it be back in the black in FY24, provided coal prices remain stable.

Source: PublicInvest Research - 29 Aug 2023