• Keep BUY, with new DCF-derived TP of MYR0.77 from MYR0.72, 16% upside and c.7% FY24F yield. Malakoff Corp’s FY23 results beat expectations on a stronger turnaround in 4Q23 led by better fuel margin impact after stripping off sizeable impairment on its JV. We expect earnings recovery to continue in FY24 on normalisation of fuel margin impact. Our call is largely premised on its decent dividend yield and resilient future earnings, anchored by the Alam Flora contribution and continuous plant stability.

• Beat expectations. FY23 core net loss of MYR409m came in above expectations, accounting for 79% and 82% of our and Street full year losses, largely led by a turnaround in 4Q23, with a core profit of MYR70m in 4Q23 after three quarter of losses.

• Results review. 4Q23 core profit was MYR70m after stripping off MYR96m impairment losses on its 40% owned foreign associate in Bahrain, AI- HIDD independent water and power project (IWPP) and also its respective one-off MYR333m impairment-led share of losses from this associate. This is a strong QoQ turnaround from a core loss of MYR86m in 3Q23 due to positive fuel margin impact following the stabilisation of applicable coal prices. Cumulatively, revenue decreased by 12% YoY in FY23 on the back of lower energy payments from Tanjung Bin Power (TBP) plant and the absence of GB3 power plant’s revenue following the expiry of the power purchase agreement (PPA) in Dec 2022, masking the higher contribution from the Tanjung Bin Energy (TBE). The company recorded a core loss of MYR409m (vs a core profit of MYR671m in FY22), 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.

• Outlook. Despite a substantial impairment losses made on AI-HIDD IWPP investment, we are guided that the associate, which encapsulates a combined-cycle gas turbine (CCGT) and water desalination plant, is still operationally profitable and the impairment made assumed no extension on its concessions beyond 2027. Meanwhile, we finally saw a positive fuel margin impact in 4Q23 and we expect the magnitude of such impact to normalise following the stabilisation of coal prices. TBP and TBE recorded a better equivalent availability factor (EAF) of 84% and 78% in FY23 (from 82% and 65% in FY22). On the other hand, Alam Flora continued to contribute stable earnings of MYR83m in FY23 (+15% Y) due to increase in frequency of cleansing and solid waste activities under the concession business.

• BUY. Our FY24F-25F earnings remain largely unchanged but our DCF-based TP is lifted to MYR0.77 from MYR0.72 after updating the latest net debt numbers and lowering our discount rate to 7.7% (from 7.9%) to factor normalisation of fuel margins. We also ascribe a 10% discount, based on our ESG score of 2.5. Downside risks: Unscheduled outages, higher operating costs, and disruption in fuel supply.

Source: RHB Research - 26 Feb 2024