MALAKOF’s 1HFY23 results disappointed. Its 2QFY23 net loss widened 4x QoQ as negative fuel margin ballooned. We now project a net loss in FY23, reduce our FY24F earnings by 10%, cut our TP by 24% to RM0.62 (from RM0.82), and downgrade our call to MARKET PERFORM from OUTPERFORM.

MALAKOF’s 1HFY23 results disappointed. It reported a net loss of RM394.4m as 2QFY23 core loss widened to RM318.7m from RM75.7m in the preceding quarter, as compared with our full-year net profit forecast of RM208.7m and the full-year consensus net profit estimate of RM190.0m.

The variance against our forecast came largely from a substantial negative fuel margin of RM676.0m at the coal fired power plants, namely Tanjung Bin Power (TBP) and Tanjung Bin Energy (TBE) as their weighted average coal cost came in higher than the applicable coal price (ACP).

Despite the losses, it declared first interim NDPS of 1.5 sen (ex-date: 27 Sept; payment date: 27 Oct) in 1HFY23 which is lower than the 2.8 sen paid in 1HFY22.

YoY. Its 1HFY23 revenue rose 11% to RM4.65b mainly led by higher power generation segment revenue as both TBP and TBE posted higher energy payment on the back of higher ACP as well as higher capacity payment for TBE given the shorter duration of plant outage. However, it turned to core loss of RM394.1m in 1HFY23 from core profit f RM170.0m due to the abovementioned negative fuel margin of RM676.m against positive fuel margin of RM61.0m recorded in 1HFY22.

QoQ. Its 2QFY23 revenue grew slightly by 3% mainly on higher capacity payment from TBE given the shorter duration of unscheduled outage. However, its core loss ballooned to RM318.7m from RM75.7m in the preceding quarter given the said negative fuel margin.

Forecasts. We now project a net loss of RM334.2m in FY23 (from net profit of RM208.7m) to account for a RM800m negative fuel margin assumption from RM80m previously. We also cut our FY24F earnings by 10% to account for a RM50m negative fuel margin.

Correspondingly, we cut our SoP-derived TP by 24% to RM0.62 from RM0.82 as we ascribe a higher Beta (1.2x from 0.6x for TBE and TBP; 1.5x from 1.0x for the rest of assets) given the earnings volatility they have demonstrated. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5). We also trim our FY23F and FY24F NDPS to 3.0 sen and 4.3 sen from 3.3 sen and 4.8 sen, respectively, where FY24F NDPS is based on an 80% payout ratio.

While we like MALAKOF for its earnings stability underpinned by IPPs and concessions, there is room for improvement in its risk management to reduce or even eliminate the unnecessary earnings volatility such as unplanned outage as well as fuel margin fluctuation. Downgrade to MARKET PERFORM from OUTPERFORM. However, its share price will be supported a decent dividend yield of >4%.

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 Aug 2023