• Keep BUY, with new DCF-derived TP of MYR0.72 from MYR0.73, 12% upside and 7% FY24F yield. Malakoff Corp’s 9M23 results missed expectations due to its continuous negative fuel margin. We expect the negative fuel margin impact to moderate in 4Q23. Despite the weak set of results, operating cash flow recovered strongly in 9M23 on the back of easing receivables and inventories. Our BUY call is largely premised on its decent dividend yield and resilient future earnings, anchored by the Alam Flora contribution and continuous plant stability.

• Below expectations. 9M23 core net loss of MYR479m came in below expectations, due to a substantial negative fuel margin – this, in turn, was the result of the volatility in applicable coal prices.

• Results review. Revenue decreased by 32% YoY in 3Q23 on the back of lower energy payments from both the Tanjung Bin Energy (TBE) and Tanjung Bin Power (TBP) plants as well as absence of GB3 power plant’s revenue following the expiry of the power purchase agreement (PPA) in Dec 2022. That said, MLK recorded a core loss of MYR85m (vs a core profit of MYR285m in 3Q22), no thanks to the negative fuel margin impact and lower JV & associate contribution. This, however, was partially cushioned by lower finance costs and depreciation charges. QoQ wise, 3Q23 core loss narrowed by 73% to MYR86m – also due to lower negative fuel margin impact.

• Outlook. We may continue to see coal fuel margin fluctuations, albeit, at a lower magnitude, affecting Malakoff’s bottomline this year and probably 1H24. Despite substantial losses, operating cash flow in 9M23 improved to MYR1bn from –MYR43m in 9M22 on the back of easing receivables and inventories. Meanwhile, its gross renewable portfolio rises to c.151MW following the solar PPA signed with DRB-HICOM for the development, operation and maintenance of 20.78MWp solar PV systems. Note, this achievement still lags behind its targets of 1000MW (for 2026) and 1400MW (for 2031). We are also positive on the recent proposed acquisition of the 49% equity stake in E-Idaman, a private limited company, which provides solid waste collection and public cleansing management services for Kedah and Perlis for a purchase consideration of MYR137m. This further expands its waste management business into other states without straining its balance sheet significantly. The transaction is expected to be completed in the next six months.

• BUY. We now revise FY23F to a net loss of MYR531m (from MYR175m loss estimate) and cut FY24F-25F earnings by 6-17% to account for the negative fuel margin. Our DCF-based TP drops to MYR0.72 post earnings adjustment with an unchanged 10% discount, based on our ESG score of 2.5. Downside risks: Unscheduled outages, higher operating costs, and disruption in fuel supply.

Source: RHB Securities Research - 27 Nov 2023