• Keep BUY, new MYR0.86 DCF-derived TP from MYR1.12, 25% upside with c.8% FY23F yield. Malakoff Corp’s FY22 core net profit of MYR671m (+94% YoY) surpassed consensus numbers on better fuel margins. Although its projected earnings should normalise in FY23-25, this stock is still trading at an undemanding 10x FY23F P/E, which is still below its 5-year mean of 12x. We expect earnings to remain resilient, anchored by the Alam Flora contribution, as well as a better plant stability

• Above expectations. FY22 core net profit of MYR671m (+94% YoY) came in significantly above consensus expectations, at 141% of the Street’s full- year estimate. The positive deviation is mainly on a higher fuel margin – as a result of higher applicable coal prices.

• Results review. Malakoff recorded core earnings of MYR204m in 4Q22 (-28% QoQ) after stripping off a MYR203m impairment loss on associates, MYR34m PPE write-off and MYR78m Tanjung Bin Energy plant (TBE) insurance claim. The weaker QoQ performance was due to a lower fuel margin, higher operational and maintenance costs and a lower contribution from Alam Flora. This is cushioned by doubling of the JV & associate contribution – mainly led by 40%-owned Kapar Energy Ventures’ (KEV) fuel margin recognition, which amounted to a MYR94m contribution in 4Q22. FY22 core profit still surged by 94% YoY to MYR671m as a result of higher fuel margins and a stronger JV & associates contribution masking the decrease in Alam Flora’s earnings.

• Outlook. As the KEV investment has been fully provided for, the 4Q22’s earnings recognition is deemed as non-recurring and management expects no contributions going forward. Both TBE and Tanjung Bin Power plants recorded lower equivalent available factor at 82% and 65% in FY22, from 89% and 73% in FY21, due to unscheduled outages. As coal prices are expected to moderate, we believe fuel margins to normalise this year. On the other hand, Malakoff will have to pursue projects more aggressively in greenfield development or even M&As, if the group wants to achieve its 1,000MW renewable energy capacity by 2026 (current: 39MW). In the meantime, Alam Flora should continue to underpin Malakoff’s earnings.

• BUY. We project Malakoff to record net profit of MYR347-394m in FY23- 25F, with the normalisation of fuel margins and better plant stability. Our DCF-based TP drops to MYR0.86, after we rolled forward our valuation base year – imputing a higher WACC and cost base, as well as with the incorporation of a 6% discount applied, based on our ESG score of 2.7. Downside risks: Higher-than-expected plant outages and operating expenses.

Source: RHB Research - 24 Feb 2023