• Malakoff’s 4Q23 underlying performance was marred by impairment losses amounting to an estimated RM429m that were recognised during the quarter.

• Stripping these out, the company swung back to the black in 4Q23, reporting a normalised net profit of RM72m, after three consecutive quarters of losses.

• Reiterate Add with an unchanged DCF-based TP of RM0.80.

4Q23 results review

• Malakoff’s 4Q23 headline numbers were distorted by one-off items that were recognised during the quarter, comprising: 1) RM96.1m impairment loss on the group’s carrying value of investment in Al-Hidd IWPP (40% foreign associate), and 2) an estimated RM333m share of impairment loss recognised at its associate Al-Hidd as guided by management. According to the company, a thorough review was conducted on the operations of this associate – including contracted tariff, energy output levels and prospects of a potential extension of the concession which expires in 2027, which resulted in these sizeable impairments.

• Stripping these out, underlying operations showed a marked improvement in 4Q23 with earnings swinging back to the black after three consecutive quarters of losses, with normalised net profit coming in at RM72m vs. a net loss of RM85m in 3Q23. The improvement was driven mainly by the recovery in fuel margins from a negative drag of RM182m in 3Q23 to a positive margin of RM30m in 4Q23 on the back of more stablised coal prices and generally better operational performance from its power generation and waste management segments.

• For the year 2023, the company reported a normalised net loss of RM433m vs . a profit of RM671m in 2022. The significantly weaker performance was attributable to the drag from the negative fuel margin realised in 2023 of RM828m vs . a positive margin of RM500m in 2023. The result was ahead of our expectations of a RM534m net loss for 2023, and Bloomberg consensus’ net loss projection of RM502m.

• The company expects the announcement on the final DPS to be made in March 2024, upon the finalisation of the audited financial statements.

Maintain Add

• Admittedly, Malakoff’s earnings delivery has been disappointing in 2023. However, we expect earnings to rebound to a net profit of RM243m in 2024F and RM262m in 2025F, on the back of a more stablised coal price environment.

• 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 find valuations attractive at just 4x 2024F EV/EBITDA, which is more than 1 s.d. below its 8-year mean. 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 ~17% 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%, based on the current share price. Downside risks: Resurgence of negative fuel margins and unplanned plant outages.

  Source: CGS-CIMB Research - 27 Feb 2024