Kenanga Research & Investment

Malakoff Corporation - Hit by Larger Fuel Margin Losses

Publish date: Mon, 29 May 2023, 04:14 PM

MALAKOF’s 1QFY23 results disappointed. Its quarterly core net loss widened to RM75.7m from RM36.1m QoQ, we believe, on larger margin losses as its weighted average coal cost came in  higher than the applicable coal price (ACP). We cut our FY23- 24F net profit forecasts by 36% and 15%, respectively, reduce our TP by 16% to RM0.80 (from RM0.95) but maintain our OUTPERFORM call.

Missed expectations. It disappointed with a net loss of RM75.7m in  1QFY23, vs. our full-year net profit forecast of RM326.0m and the full-year consensus net profit estimate of RM380.4m. The variance against our forecast stemmed mainly from substantial negative fuel margins recorded by Tanjung Bin Power (TBP) and Tanjung Bin  Energy (TBE) coal plants as MALAKOF’s weighted average coal cost came in higher than the ACP or a reference market price agreed by parties to the power purchase agreement (PPA). No dividend was declared as it usually pays half-yearly dividends.

YoY. 1QFY23 revenue rose 21% due to higher energy payments from TBP and TBE on the back of higher reference coal price. However, it dipped into a net loss of RM75.7m from net profit of  RM50.9m in 1QFY22 due to a higher weighted average coal cost against the ACP as mentioned above for TBP and TBE coal plants,  resulting in fuel margin losses. Meanwhile, Alam Flora’s net profit fell  16% owing to higher outsourcing costs and other opex.

QoQ. 1QFY23 topline contracted by 21%, we believe, due to lower  energy payments on lower refence coal price sequentially. Its quarterly core net loss widened to RM75.7m from RM36.1m loss in  the previous quarter (after stripping off a RM78.0m TBE insurance claim), we believe, on larger margin losses. Not helping either, was the high base of contributions from JVs and associates in 4QFY22  stemming from RM93.9m fuel margin gain at Kapar Energy  Ventures. Meanwhile, Alam Flora earnings normalised to RM28.8m  (from RM8.0m).

Forecasts. We cut our FY23-24F net profit forecasts by 36% and  15%, respectively, to reflect: (i) fuel margin losses in FY23, and (ii) lower operating earnings base of TBP and TBE (which was distorted to the upside by fuel margin gains especially in FY22).  Consequently, we also cut our dividend forecast based on an unchanged dividend payout ratio of 80%.

MALAKOF’s earnings in FY22 were boosted by fuel margin gains on rising commodity prices but felt the brunt of a reversal in 4QFY22  and 1QFY23. However, with coal prices stabilising in recent months,  we expect fuel margin losses to ease going forward.

Post-earnings revision, we cut our SoP-derived TP by 16% to  RM0.80 from RM0.95 previously. There is no adjustment to our TP  based on ESG given a 3-star rating as appraised by us (see Page  5).

We like MALAKOF for its earnings stability underpinned by IPPs and concessions. However, there is room for improvement in its risk management to reduce or even eliminate the unnecessary earnings volatility. We still see value in the company at its current share price,  which will also be supported by a decent dividend yield of c.5%.  Maintain OUTPERFORM.

Risks to our recommendation include: (i) regulatory risk, (ii) unplanned outages leading to lower capacity payment thus affecting earnings, (iii) non-compliance of ESG standards set by various stakeholders, and (iv) earnings volatility stemming from fuel margin gains or losses.

Source: Kenanga Research - 29 May 2023

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