• We believe value has emerged for Malakoff following the recent correction in share price, with the stock potentially offering net yields of >7%.

• At current levels, we think the market is overlooking the group’s strong FCF generation as earnings normalise on the back of more stable coal prices.

• Reiterate Add with a DCF-based target price of RM0.80.

A Value Play With Attractive Dividend Yields on Offer

We believe value has emerged following Malakoff’s 16% share price correction since midApril 2023, with the stock currently trading at close to its all-time low of RM0.57 in June 2023 (Fig 1). We find valuations attractive at just 3.9x 2024F EV/EBITDA, which is more than 1 s.d. below its 8-year mean (Fig 2). At current levels, we think the market is overlooking the group’s strong FCF generation once its earnings normalise on the back of more stable coal prices. We project FCF yields of ~18% for 2024F and 2025F, which we believe can sustain dividend payouts of 95% (average payout over 2017-2022 was 95%), translating to a 2024F-2025F net yield of 7-8%, based on the current share price.

Earnings Look Set to Rebound in 2024F-2025F

Admittedly, earnings delivery has been disappointing this year, with the company reporting significant losses in 9M23 (Fig 3), mainly due to the negative fuel margin arising from the mismatch between the calculations of energy payments and fuel costs. After collapsing by 68% from a high of US$413/MT in 3Q22 to US$134/MT QTD (Fig 4), coal prices appear to have normalised to a large extent and the sharp movements appear to have moderated (Fig 5). We had previously treated the fuel margins as an exceptional item. However, given its recurring nature and consequent sizeable impact on cashflows, we now treat the item as part of core operations. As such, we estimate Malakoff will record a 2023F normalised net loss of RM534mvs.our previous forecast of RM266m net profit. Our estimates for 2024- 25F remain largely unchanged as we do not expect sharp fluctuations in coal prices and hence have not assumed any fuel margin in our forecasts (Fig 6). As a result, we expect earnings to rebound to a net profit of RM243m in 2024F and RM262m in 2025F. Beyond 2025F, there is earnings upside potential from the 84MW mini-hydro plants in Kelantan, waste-to-energy facility in Melaka, gas-fired power plants and potential new solar projects.

Room for a Recovery in Dividends Alongside Better Cashflows

Alongside the recovery in earnings that we project going into 2024F, we expect cashflow generation from operations to improve, which should in turn lead to a revival of dividends. We forecast FCF (excluding distortions from working capital) to expand from RM400m in 2023F to a more normalised average run rate of RM1.3bn in 2024F and 2025F. As such, we see the prospect of higher dividends over the next two years from a cut in 2023F (Fig 7). We maintain our DCF-based TP of RM0.80 (WACC: 9.2%; TG: 0%) as our longer-term forecasts remain largely unchanged. Key re-rating catalysts: earnings accretive RE capacity expansion and a recovery in dividends going into 2024F. Downside risks: negative fuel margins remaining persistently high and unplanned plant outages.

Source: CGS-CIMB Research - 5 Dec 2023