We visited Malakoff’s primary power plants – the 2,100MW Tanjung Bin Power (TBP) and 1,000MW Tanjung Bin Energy (TBE), hosted by the Group’s top management comprising the Managing Director/Chief Executive Officer, Chief Operating Officer (Power), and Chief Financial Officer. During the visit, management shared on the plants’ operating performance and its future plan to capitalise on existing resources within the vicinity of Tanjung Bin. All in, we maintain our view that it will continue to face short-term headwinds due to prolonged negative fuel margin until 4QFY23 albeit narrowing losses, in tandem with the narrowing gap between weighted average coal price (WACP) and applicable coal price (ACP). Having confidence in its assets over the longer-term however, we retain our DCF-based TP of RM0.70 but upgrade our call to Outperform (from Neutral). This is on account of attractive relative valuations, after share price dipped post-release of its 2QFY23 result which surprised negatively.

• To recap, the Group’s core net losses widened to RM318.7m in 2QFY23, from core net loss of RM75.7m in 1QFY23. The disappointment was mainly attributed to negative fuel margins from Tanjung Bin Power (TBP) and Tanjung Bin Energy (TBE) with amounts of RM556.2m and RM14.9m respectively.

• Tanjung Bin Power (TBP) and Tanjung Bin Energy (TBE) are located in the similar vicinity of Tanjung Bin Plant Complex in Kukup, Pontian Johor. TBE has better efficiency and less carbon footprint as compared to TBP due to two main reasons: i) the turbine generator and, ii) the type of fuel. TBE is an Ultra Supercritical power plant as it uses a combination of one high-pressure, one intermediate-pressure and two low-pressure turbines. It also uses 100% sub-bituminous coal (less carbon) as compared to TBP, which operates a mixture of 70/30 bituminous / sub bituminous. (Table 1)

• TBP has been worse-hit by negative fuel margin due to sharp drops in bituminous coal prices (-67% YTD) as compared to sub-bituminous coal, which only dropped by 38% YTD, and in a more stable manner (Figure 1). In the illustration given, the negative fuel margin occurred since December 2022 as WACP is higher than ACP (Figure 2). WACP is calculated based on the actual coal price purchased from TNB Fuel (TNBF), while ACP is the reference price to calculate Energy Payment by Single Buyer.

• Ideally, both WACP and ACP should mirror the movement in stable market. However, WACP moves slower than ACP (track closely with global coal price) in extreme volatility due to two reasons: i) 1-month inventory requirement in Power Purchase Agreement (PPA) to ensure uninterrupted thermal combustion, and ii) lower energy dispatch from initial nomination due to merit order. Despite of the negative fuel margin in FY23, the Group is still in-the-money on an overall basis as it has benefitted from the positive fuel margin in the past few years.

• On its path towards green energy, TBP has been selected as one of the National Energy Transition Roadmap (NETR) flagship project catalyst for Biomass Co-firing. The fuel source of biomass is mainly from empty fruit bunch (EFB), rice husks pellets and wood chips. In December 2022, it completed a Trial Burn at 0.5% per generating unit at one turbine of TBP. Moving forward, it is looking to increase to 3-5% per generating unit for Pilot Phase in 2024 and subsequently increase further at minimum 15% for all units in 2027 for commercial operations. However, we understand the securing a constant supply of the fuel source could be a challenge due to competition from global bioenergy players.

• Capitalising on existing resources for future development. As TBP’s power purchase agreement (PPA) is expiring in 2031, the Group is ready to replace TBP with new Combined Cycle Gas Turbine (CCGT) by using its existing land area, transformer, grid connection and other infrastructure that is readily available. This is a unique proposition in future tender bids for CCGT power plants, with gas deemed as transitionary energy source while capacity and reliability of renewable energy is built up to eventually replace fossil fuels.
  On another note, Tanjung Bin Plant Complex could be open to new solar photovoltaic plants of up to 124 MW, to tap on solar schemes in Malaysia such as Corporate Green Power Purchase (CGPP) and potential export to Singapore.

Source: PublicInvest Research - 26 Sept 2023