MALAKOF expects a further decline in the applicable coal price (ACP) over the medium term, following a sharp decline in 1QFY23. However, as the drop in the ACP is gradual, its impact on earnings will be less significant. Meanwhile, two scheduled outages planned between Jun and Aug this year will not affect capacity payments. We maintain our forecasts, TP of RM0.80 and OUTPERFORM call.

We came away from MALAKOF’s post-1QFY23 results briefing feeling encouraged on its prospects.

1. 1QFY23 net loss of RM75.7m (vs. a net profit of RM50.9m in 1QFY22) was mainly attributable to: (i) a RM70m loss on fuel margin vs. a gain of RM30m a year ago, (ii) a lower share of profit from associates and JV by 59% to RM19.6m from RM47.7m owing to 47% decline in Shuaibah’s earnings on changes in accounting treatment and profit not recognised for Hidd Power consequent to impairment assessment carried out in 2022. In addition, there was an absence of capacity payment (c.RM57m per quarter) from GB3 Power Plant upon the expiry of the IPP’s PPA in end-2022.

2. The RM70m loss on fuel margin was mainly due to the sharp decline of coal prices at the beginning of the year, following a significant surge in prices throughout 2022. This resulted in the weighted average coal inventory cost being higher than the ACP, the market price paid by the off-taker TENAGA. MALAKOF expects coal price to decline further over the medium term.

3. The coal supply is procured through TNB Fuel Services. Under the PPA term, the IPP is required to maintain a minimum of one month’s worth of coal supply, and typically, the IPP maintains a standby stock inventory of 2-3 months at all times. MALAKOF has no control over the energy dispatch which is at TENAGA’s discretion which could affect the inventory level at MALAKOF’s end

4. Tanjung Bin Energy (TBE) coal plant registered higher capacity payment by 119% YoY due to shorter duration of unscheduled outages. However, Tanjung Bin Power (TBP) recorded flattish capacity payment despite achieving a higher equivalent availability factor (EAF) of 82% vs. 72% previously, due to scheduled outages. Going forth, TBP will have 45 days scheduled outages in June while TBE will shut for 50 days of planned maintenance in August. The planned outages will not affect its capacity payment.

Forecasts. Maintained as we have factored in RM150m fuel margin loss in FY23F. With stabilising coal cost, fuel margin losses will be manageable going forward.

We like MALAKOF for its earnings stability underpinned by IPPs and concessions. The significant fuel margin gains/losses occurred in FY22 and 1QFY23 are unlikely to repeat as commodity prices have stabilised. We still see value in the company at its current share price, which will also be supported by a decent dividend yield of >5%. Maintain OUTPERFORM with unchanged SoP-derived TP of RM0.80 (see next page). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

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 - 30 May 2023