MALAKOF’s FY23 results disappointed due to share of huge losses from a Bahraini associate. On a brighter note, its fuel margin finally turned positive in 4QFY23 as coal prices stabilised. We raise our FY24F net profit forecast by 19%, lift our TP by 13% to RM0.68 (from RM0.60) but maintain our MARKET PERFORM call.

MALAKOF disappointed with a net loss of RM837.2m in FY23, against our net loss forecast of RM502.3m and the consensus net loss estimate of RM547.0m. The variances against our forecast came largely from the share of RM333.0m losses in 4QFY23 from its 40%- owned AI Hidd Independent Water and Power Producer (IWPP) in Bahrain pursuant to an accounting adjustment on the basis that there will not be further extension to the concession.

No dividend was declared during the period given the huge losses. As such, FY23 full-year NDPS was only 1.5 sen (paid in 2QFY23) vs. our forecast of 3.0 sen.

YoY, its FY23 revenue declined 12% due to lower power generation revenue as energy payment for Tanjung Bin Power (TBP) was impacted by a lower applicable coal price (ACP) and the absence of revenue from GB3 Plant as its PPA expired in Dec 2022. This was mitigated by higher energy payment and capacity payment from Tanjung Bin Energy (TBE) on higher despatch factor and shorter duration of plant outage.

It reported a whopping core net loss of RM837.2m due to: (i) a huge negative fuel margin of RM828.2m, and (ii) share of associate losses of RM201.1m as huge losses from Al Hidd IWPP in 4QFY23 wiped out the entire associate profits accumulated during the first three quarters of FY23.

QoQ, its 4QFY23 revenue rose 5% on the back of 6% hike in power generation revenue which we believe was due to higher energy payments for both TBP and TBE given MALAKOF reported first positive fuel margin (RM30m vs. negative fuel margin of RM182.2m in 3QFY23) since 3QFY22.

However, its 4QFY23 core net loss widened to RM357.1m (from RM85.6m) due to the RM333.0m share of loss as mentioned above. Excluding the RM333.0m share of loss and RM96.0m impairment loss on the group’s carrying value of investment in Al Hidd IWPP, MALAKOF would have recorded a net profit of RM72.0m in 4QFY23.

Forecasts. We raise our FY24F net profit forecast by 19% as we: (i) remove RM50m negative fuel margin assumption, and (ii) raise share of associate profits by 7%. We introduce our FY25F numbers with a net profit to grow by 24% underpinned by continue improvement from Alam Flora and overall low interest expenses. No change to our dividend payout ratio assumption of 80%.

Valuations. Correspondingly, we increase our SoP-derived TP by 13% to RM0.68 (see Page 3) from RM0.60. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. 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 from unplanned outages as well as fuel margin fluctuation. As such, we maintain our MARKET PERFORM call which is supported by a decent dividend yield of >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 - 26 Feb 2024