MALAKOF’s 1QFY24 met expectations. Its returned to the black with earnings normalising on the back of a stable coal price environment (vs. a sizeable negative fuel margin a year ago). We maintain our FY24-25F forecasts, TP of RM0.68 and MARKET PERFORM call.

MALAKOF’s 1QFY24 net profit of RM62.2m met expectations, at 26% and 23% of our full-year forecast and the full-year market consensus, respectively. No dividend was declared during the quarter as it usually pays half-year dividends.

YoY. Its 1QFY24 revenue was flattish but it returned to the black with a net profit of RM62.2m, vs. a net loss of RM75.7m in 1QFY23 when its coal-fired power plants, namely Tanjung Bin Power (TBP) and Tanjung Bin Energy (TBE), were hit by negative fuel margin of RM104.9m as their weighted average coal cost came in sharply higher than the applicable coal price (ACP). We understand that there was minimal negative fuel margin in 1QFY24 as coal price stabilised.

QoQ. Its 1QFY24 revenue inched up 1% and similarly, it returned to the black in 1QFY24 vs. a net loss of RM357.1m in 4QFY23 (due to RM333.0m share of loss from AI-Hidd IWPP and RM96.0m impairment loss on the group’s carrying value of investment in AI-Hidd IWPP).

Forecasts. Maintained.

Valuations. We maintain our SoP-derived TP of RM0.68 (see Page 3). 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 c.5%.

Risks to our recommendation include: (i) regulatory risks, (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 2024