MALAKOF’s RM1.22b hydropower plants in Kelantan have achieved financial close. They will potentially help to cushion the impact from the retirement of MALAKOF’s older generating capacity in 2019-2027, albeit in a small way. We maintain our forecasts (as they will only start contributing from FY26) but raise our TP by 3% to RM0.82 (from RM0.80). Maintain OUTPERFORM.

Last Friday, MALAKOF announced that its 70%-indirectly owned unit RP Hydro (Kelantan) Sdn Bhd (RPHK) had achieved financial close for three small hydropower plant (SHP) projects, namely Kemubu SHP, Kuala Geris SHP and Serasa SHP with a combined installed capacity of 84MW, to be constructed along Sungai Galas in Kuala Krai, Kelantan.

The RM1.22b SHP projects will adopt an 80:20 debt-to-equity funding structure, with the debt to be raised from an RM975m ASEAN Green SRI Sukuk Wakalah. With the financial close, RPHK can now commence the construction works while the commercial operation date (COD) will be Dec 2025. These SHPs have a project IRR of high single-digit with 21 years of power purchase agreement (PPA).

We are positive on this new project, albeit the small capacity, for MALAKOF’s effort to look for new earnings base following the expiry of 436MW PD Power Plant in Feb 2019 and 640MW GB3 Power Plant in Dec 2022. In addition, the PPA for 350MW Prai Power Plant will expire in 2024 while the 1,303MW SEV Power Plant will expire in 2027.

Forecasts. Maintained our FY23-24F forecasts as the SHP will only contribute from FY26 onwards. Assuming a project IRR of 8%, the new plants (based on 70% equity stake) will add 2.0 sen to our SoP valuation to RM0.82 from RM0.80.

We like MALAKOF for its earnings stability underpinned by IPPs and concessions. 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 a higher SoP-derived TP of RM0.82 (see next page) from RM0.80 previously as we include these new plants into our valuation. 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 - 17 Jul 2023