We came away from a meeting with management feeling positive on Malakoff’s earnings recovery and its prospect on cashflow generation. The setback on negative fuel margin in 3 consecutive quarters is expected to be resolved from 4QFY23 onwards on the back of stable coal prices. Meanwhile, prospects on the thermal energy business remains buoyant with 4,000MW new capacity to be installed by 2030. Having synergy in both thermal energy and waste management, Malakoff-Alam Flora JV is about to secure a waste-to-energy (WTE) plant project in Melaka as part of its strategy to achieve 1,400MW target of renewable energy (RE) portfolio by 2031. All in, we revise our forecast by 4.4% and 9.8% for FY24F and FY25F to reflect higher growth in its environmental solutions segment. We upgrade our call to Outperform call (from Trading Buy) with higher TP of RM0.80 (from RM0.70), after reflecting the changes.

• Stable coal price to resolve negative fuel margin. After incurring core net loss of RM480m for 9MFY23 due to negative fuel margin loss of RM858.4m, we expect the setback would be finally resolved from 4QFY23 onwards on the back of stable coal prices. Newcastle Coal prices seem to have bottomed out at USD119/MT in November 2023, a 28-month low and has stabilized in the range of USD120-150/MT in 4Q 2023. This allows the Applicable Coal Price (ACP) to achieve equilibrium or narrow the gap with Malakoff’s Weightage Average Coal Price (WACP), which is at breakeven or negligible margin on its fuel cost.
   
• Thermal energy continues to provide stable cashflow. Three power purchase agreements (PPA); Prai Power Plant 350MW, SEV Power Plant 1,303MW and 40%-owned of Kapar Power Plant 2,200MW are set to expire by 2024, 2027 and 2029. Despite the Government’s target of achieving 70% of RE capacity mix by 2050, thermal power plants remain essential as base load capacity to provide reliable energy security with optimal generation cost. Based on Peninsular Malaysia’s Generation Development plan, there is about 1,200MW and 2,800MW of new combined cycle gas turbine (CCGT) power plants to be installed by 2029 and 2030 to replace the 2nd generation independent power producers (IPP). We believe Malakoff could be frontrunner to secure the new CCGT considering its position and track record as the largest IPP in the country.
   
• Charting growth in environmental solutions segment. The outlook on environmental solutions remains optimistic with national domestic waste generation expected to grow from 14m MT/year in 2021 to 19m MT/year in2050, in tandem with population growth. For the period of FY2022, Alam Flora collected 1,169k MT of domestic waste, an increase of 3.2% YoY. Domestic waste collection is continuously growing by 4.6% YoY to 859.1k MT for 9M2023. On its non-concession business, Malakoff continues to explore development of scheduled waste facilities, i.e Port Reception Facilities (PRF), Integrated Eco-Recovery Complex (IERC), Sustainable Facility and Eco-Park Centre (SAFE)
  
  On similar note, the segment is also growing inorganically by acquiring a 49% equity interest in E-Idaman SB for RM133.2m. The expansion will allow Malakoff to have waste management footprint in the Northern region and provide stable income stream until 2033 via the concession business.
   
• Set to secure WTE concession. As a result of the synergy in both thermal energy and waste management, Malakoff-Alam Flora JV is about to secure 22MW WTE plant concession in Malaka. The concession will allow the JV to have exclusivity on 800MT per day of waste from all 4 local authorities in Melaka to generate electricity. The management guided that the WTE will use a sophisticated burner, which has ability to burn domestic waste at general wetness of 50-60%. Thus, this will eliminate separation process requirement that may cause critical mechanical failure prior burning the waste. At the moment, we have yet to count in the WTE contribution, pending finalisation of concession agreement with targeted commissioning date by 2027.
   
• Selective and cautious while achieving 1,400MW RE target. Malakoff has secured 153MW capacity in its RE portfolio, which comprises of 40MW rooftop solar, 84MW mini hydro and 29MW of large scale solar. Despite having an aggressive target to grow more than 9-fold from its current base to 1,400MW (potentially via greenfield and merger and acquisition), Malakoff is taking a selective and cautious approach to deploy its capital into any RE projects or acquisition. In the case of the WTE project, introducing a sophisticated technology may require high capital expenditure, however it is expected that the project would still be able to deliver at reasonable midsingle digit internal rate of return (IRR). The similar feature also would minimise operational risk and avoid cost overrun that may be costly and possibly render its returns negative. We are positive with the approach as the management will be able find the right balance between return and risk prior embarking into any RE project in current low-return environment due to high competition.

Source: PublicInvest Research - 15 Jan 2024