• Keep BUY and DCF-derived TP of MYR0.73, 21% upside and c.8% FY24F yield. Post site visit, we have better understanding of Malakoff Corp’s thermal assets and potentials at the Tanjung Bin site. The group, in our view, stands a chance to secure new gas plant in the longer run while we see further upside should it be able to secure energy export deals to Singapore.

• TBP/TBE site visit. Last Friday, Malakoff hosted an analyst site visit to the 2100MW Tanjung Bin Power (TBP) & 1000MW Tanjung Bin Energy (TBE) coal fired power plants in Johor. TBP recorded a declining equivalent availability factor (EAF) from 92% in 2020 to 81.7% in 2022 due to higher scheduled outage rate (SOR) of 5.4-13.3% and forced outage rate (FOR) of 2.6-5%. Its YTD-Aug 2023 is at 79.4% where both SOR and FOR recorded at 16% and 4.5%. Meanwhile, TBE’s EAF has recovered to 90.2% in YTD-Aug 2023 from last year’s 65%, and is on par with 2020’s 90.2% following the resolution of the design-led turbine blade failure. The group is engaging with consultants to explore the coal plants’ possibility of running in a more flexible way with more dynamic dispatch.

• Future plans at TBP/TBE. Malakoff sees the opportunity to increase its gas portfolio mix given it will remain as the dominant source of fuel for baseload power till 2050. One of the options to replace TBP/TBE’s coal earnings post its power purchase agreement (PPA) expiry is to build a potential new combined cycle gas turbine (CCGT) plant at the site with a potential capacity up to 2,250MW. Furthermore, the group is targeting energy export to Singapore. We understand that there are three potential sites in Tanjung Bin with a potential 124MW solar PV development.

• Fuel margin impact explained. Fuel margin is the difference between fuel income, which is calculated based on applicable coal prices (ACP) and fuel cost, which is derived based on weighted average cost of coal purchase price. Coal procurement is done on a monthly basis and Malakoff is now keeping a one-month coal inventory level – the minimum requirement in accordance to the PPA terms. Although coal prices are largely passed through with fuel income, forming part of the energy payment for Malakoff, there is always a difference between these two components given ACP is derived from a reference to forecasted global Newcastle coal prices. We are guided that negative fuel margin is likely to persist in 3Q23, albeit, at a moderate extent.

• Keep BUY. With no changes in our earnings estimates, our DCF-based TP kept at MYR0.73 with an unchanged 10% discount, based on our ESG score of 2.5 for the stock, as per our proprietary in-house methodology. Downside risks: Higher-than-expected plant outages and operating expenses.

Source: RHB Securities Research - 25 Sept 2023