We left Malakoff Corporation Berhad’s (MALAKOF) virtual analyst briefing with the following key takeaways: (i) Expect normalised weighted average coal price by 4QFY23; (ii) MALAKOF to lead biomass co-firing project under NETR; (iii) The group is interested in new renewable energy ventures. No change to our earnings forecasts. Upgrade MALAKOF to Buy with an unchanged TP of RM0.67/share based on SOP valuation, considering the higher upside potential following the recent plunge in share price.

Expect Normalised Weighted Average Coal Price by 4QFY23

According to management, MALAKOF usually purchases coal 3 months in advance and locks in the applicable coal prices (ACP) 1.5 months ahead of despatch. The negative fuel margin faced by the group is driven by higher weighted average cost of coal compared with ACP at the point of electricity generation during period of decreasing coal prices due to (i) the group keeping at least one month of coal inventories as per PPA signed, and (ii) ordering excess coal inventories as compared with actual demand.

Considering that the Newcastle Coal Prices and the Indonesia sub-bituminous Coal Prices (Figure 1) have stabilised since around May 2023, we expect the group to return to the black by 4QFY23 once MALAKOF uses up the older inventories of coal. Management guided that the group expects to use up the more expensive coal and the weighted average coal price is expected to normalise by 3QFY23 or 4QFY23 depending on the demand for electricity. This is provided that the coal prices remain stable moving forward.

MALAKOF to Lead Biomass Co-firing Project Under NETR

On 27 July 2023, Minister of Economy, Rafizi Ramli launched the National Energy Transition Roadmap (NETR). The NETR comprises 10 catalytic projects worth RM25bn. One of the flagship projects is helmed by MALAKOF where the group will be leading the co-firing initiative at the 2,100MW Tanjung Bin Power Plant by burning biomass along with coal. The pilot phase of co-firing will commence in 2024 and targets to scale up to a minimum of 15% by 2027.

Interested in New Renewable Energy Ventures

MALAKOF has achieved financial close on RP Hydro Kelantan Sdn Bhd, an 84MW run-of-river small hydropower plant project to be developed in Kelantan. The project marks the group’s venture into the hydropower segment and should provide MALAKOF with valuable experience in hydropower projects. Meanwhile, MALAKOF is interested in bidding for the remaining 236.6MW unallocated portion of Corporate Green Power Programme (CGPP) after being unsuccessful in the first tranche. This is in line with the group’s target to achieve 1,400MW of renewable energy in its portfolio by 2031. We believe this is a difficult but necessary transition for the group as the world moves towards net zero emission.

Impact

No change to our earnings forecasts.

Valuation

Following the plunge in its share price after reporting a lacklustre 2QFY23 results, we upgrade MALAKOF to Buy with an unchanged TP of RM0.67/share based on sum-of-parts valuation, considering the higher upside potential compared with previously.

Source: TA Research - 30 Aug 2023