We visited Alam Flora’s Fasiliti Inovasi Kitar Semula (FIKS) in Putrajaya yesterday. MALAKOF is making the right move to fill the earnings gaps left by its expiring fossil fuel-powered power plants with cleaner utility businesses such as waste management. However, it takes time to grow the size of these new businesses. We keep our forecasts, TP of RM0.63 and MARKET PERFORM call.

The takeaways from the visit are as follows:

1. FIKS is a one-stop centre for public to learn about recycling process and waste management. It was built in 2016 with recycled materials such as used shipping containers and wooden pallets, to create a physical environment that educates the public on the 3R concept (reduce, re-use and recycle) as well as to help reduce recyclable waste sent to landfills.

2. The total waste in Malaysia is forecasted to grow to 19m tonnes by 2050 (from 14m tonnes in 2021). This has brought about new opportunities in the waste management sector, such as recycling, recovery and sustainable waste treatment as waste diversion in waste management solutions. Waste-to-energy (WTE) project is one of the keys to waste management solutions helping to covert waste into energy and reduce reliance on fossil fuels.

3. WTE project helps to improve the air quality by reducing the amount of waste that is burned in open fires or sent to landfills. Thus, it helps to improve public health. In addition, WTE generates revenue from the sale of electricity or heat generated from the waste. This added revenue can help to offset the costs of construction and operation of the WTE project.

4. Meanwhile, the National Solid Waste Management Department (JPSPN) has planned to build 22 WTE plants throughout Malaysia. Currently, four WTE plants are awarded for construction in Melaka, Selangor, Kuala Lumpur and Johor. Next WTE plants in the pipeline are Semeling (Kedah), Seelong (Johor) and Jabor Kuantan (Pahang).

5. The WTE Sungai Udang (Melaka) with a power installed capacity of 22.1MW was awarded to MALAKOF on a public-private partnership (PPP) structure with a concession period of 34 years (three years of construction period, 30 years operational period and one year closure period). Total project cost is c.RM700m (including RM500m EPC portion) with equity returns of 8%-9% and the plant is expected to be ready by 2027.

6. There are two revenue sources for MALAKOF from this plant, i.e., tipping fee payment (tipping fee of RM96/MT with minimum incoming waste volume of 800 ton per day) and sale of electricity (PPA for 21 years at 42 sen/kWh). Revenue mix between the two is 55:45. With the help of FIKS experience, the WTE plant is expected to improve the waste management quality, which in turn help to generate higher electricity and lower maintenance cost and thus generate better returns for MALAKOF.

Conclusion: While expanding environment solutions business including the latest proposed acquisition of 49% equity stake in E-Idaman Sdn Bhd will not make a significant earnings impact in the near term, it does speak for MALAKOF’s efforts in looking for new earnings streams to replace its expiring PPAs. Two of its power plants had already expired recently, i.e., the 436MW PD Power Plant in Feb 2019 and 640MW GB3 Power Plant in Dec 2022. In addition, the PPA of its 350MW Prai Power Plant will expire in 2024, 1,303MW SEV Power Plant in 2027 and 40%-owned Kapar Power Plant in 2029.

Forecasts. Maintained. 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 unnecessary earnings volatility such as unplanned outage as well as fuel margin fluctuation. We maintain our MARKET PERFORM call at unchanged SoP-derived TP of RM0.63. The stock is supported by a decent dividend yield of >4%. 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 - 21 Nov 2023