Malakoff Corporation Bhd (Malakoff) recorded a core LATAMI of RM390mn in 1H23 vs RM170mn of PATAMI, stemming from prolonged negative fuel margin, higher operating insurance cost, and lower profit from associate and joint venture. The result was significantly below our and market forecast. We foresee that 3Q23 to be slightly better given global coal price has declined c.50% in June 2023. We also commend Malakoff for its ESG effort in: 1) biomass cofiring project at its Tanjung Bin Power (TBP) plant that scheduled for a pilot phase in 2024 and 2) its recent involvement in 84 MW small hydropower plant project in Kelantan. However, we remain cautious on any unscheduled plant outages or maintenance as well as uncertainties in the current global energy landscape. Downgrade to HOLD call with lower DCF derived TP of RM0.62, based on 20% discount rate.

• Below expectations. 1HFY23 core LATAMI of RM390mn was below our inhouse and street estimates.

• Dividend. The Group declared interim dividend of 1.5sen per ordinary share in 2Q23, versus 2.8sen in 2Q22.

• Key highlights. Tanjung Bin Energy (TBE) and Tanjung Bin Power (TBP) exhibit distinct Applicable Coal Price (ACP) due to their fuel compositions. TBE, a supercritical coal-fired power plant, relies entirely on sub-bituminous coal, whereas TBP, also a coal-fired power plant, employs a combination of bituminous and sub-bituminous coal types, with proportions of up to 70% and 30%, respectively.

• QoQ. In 2Q23, revenue increased by 3.5% to RM2.4bn, owing to higher energy payment recorded from TBP and TBE coal plants, which in line with higher ACP.

• YoY. Revenue rose slightly by 2.0% attributed to amplified energy payment and capacity income derived from TBE. This upswing was driven by a higher ACP and a shorter duration of plant outage, coupled with higher energy payment from Segari Energy Ventures (SEV) due to an increased despatch factor. Nevertheless, these gains were offset by lower energy payment from TBP, which was dragged by decline in ACP and the absence of revenue contribution from GB3 plant that expired on 30 December 2022. Despite these, the Group posted a LATAMI of RM319mn (versus PATAMI of RM119mn in 2Q22) due to sizeable negative fuel margin of RM571mn, higher operating insurance cost, and lower profit contribution from associate and joint venture.

• Outlook. We opine 3Q23 to be slightly better, as global coal price (Newcastle coal) has gone down c.50% in June 2023 from USD251/tonne in Jan 2023. ESG wise, we commend Malakoff for its 1) biomass cofiring project that eligible as NETR Phase 1 flagship catalyst projects at its 2.1GW TBP Plant which involves the burning of biomass along with coal - that scheduled for a pilot phase in 2024, and 2) its recent penetration of 84 MW run-of-river small hydropower plant project in Kelantan. Notwithstanding, we remain cautious on any unscheduled plant outages or maintenance and uncertainty in current global energy crisis that could drive fuel cost price higher.

• Forecast. We trimmed our FY23F/FY24F/FY25F earnings forecast lower by 42%/34%/67% to RM144mn/RM196mn/RM218mn respectively, as we revised higher average fuel cost, operating insurance, and lower share from JV segment.

• Our call. Downgrade to HOLD call with lower TP of RM0.62 which is based on 20% discount to our DCF derived TP. The applied discount is justifiable, in our view, considering the expansion of its RE and environmental segment, might require a considerable duration to achieve a break-even point.

Source: BIMB Securities Research - 29 Aug 2023