We recently visited Malakoff Corporation Bhd’s Tanjung Bin Power (TBP) and Tanjung Bin Energy (TBE) power plant located in Pontian, Johor. The turbine failure at TBE in November 2021 has been resolved and both TBP and TBE are expected to be operationally stable moving forward. However, TBE may have much lower capacity factor in 4QFY23 due to the extensive outages planned. Negative fuel margin is expected to persist in 3QFY23 albeit at a lesser extent than 2QFY23. Meanwhile, the group has completed trial burn of 0.5% co-firing with empty fruit bunch in December 2022 and targets to scale up to a minimum of 15% co-firing by 2027. Regarding the future of TBP/TBE, the group sees the potential of combined-cycle gas turbine and solar PV Plants at Tanjung Bin. We view these potential developments positively due to the potential cross-border export of cleaner energy sources to Singapore. No change to our earnings forecasts. Maintain Buy with an unchanged TP of RM0.67/share based on sum-of-parts valuation.

TBP/TBE Expected to be Operationally Stable Moving Forward

We recently visited Malakoff Corporation Bhd’s (MALAKOF) Tanjung Bin Power (TBP) and Tanjung Bin Energy (TBE) power plant located in Pontian, Johor. TBP is a sub-critical coal fired power plant, fully commissioned in 2007 with a generation capacity of 2,100MW and the power purchase agreement (PPA) is expiring in 2031. On the other hand, TBE is an ultra supercritical coal fired power plant with a generation capacity of 1,000MW and the PPA is expiring in 2041.

Back in November 2021, TBE’s encountered a forced outage due to an unforeseen low pressure turbine failure, which was only resolved in February 2022. This has led to elevated unscheduled outage rate (UOR) above the threshold and hence a lower capacity payment (Figure 1). Fortunately, the turbine failure issue has since been resolved and the capacity payment is expected to normalise for TBE. Meanwhile, TBP’s UOR remains below the threshold and the capacity payment remains stable (Figure 2). Note that TBP has a 4-day maintenance outage scheduled in 3QFY23 and another 6-day major overhaul scheduled in 4QFY23, while TBE has a lengthy 55-day scheduled outage planned in 4QFY23. We believe TBE will have much lower capacity factor in 4QFY23 due to the extensive outages planned.

Negative Fuel Margin Expected to Persist in 3QFY23

During the visit, the management provided more clarity on the impact of fuel margin on MALAKOF. Fuel margin is the difference between fuel income and fuel cost. Fuel income is calculated based on applicable coal price (ACP) while the fuel cost for MALAKOF is based on the weighted average cost of coal purchased. Although fuel costs should be largely pass through, MALAKOF experienced negative fuel margin as the weighted average cost of coal lags the change in ACP (derived from forecasted global Newcastle coal prices). To minimise the impact of negative fuel margin, the group has reduced the coal inventories to 1 month, which is the minimum required under PPA.

TBP, sub-critical coal plant that utilises both bituminous and sub-bituminous coal types of up to 70% and 30% respectively, experienced a steeper negative fuel margin compared with TBE that utilises 100% sub-bituminous coal type. This is due to much steeper change in the benchmark Newcastle coal price (bituminous) compared with sub-bituminous coal (Figure 3). In 1HFY23, TBP recorded a negative fuel margin of RM643.6mn while TBE recorded a negative fuel margin of RM32.4mn. Management guided that the group will continue to be dragged by negative fuel margin in 3QFY23 but at a lesser extent than 2QFY23.

Targets 15% Biomass Co-firing at TBP by 2027

Biomass co-firing is one of the flagship projects identified under the National Energy Transition Roadmap (NETR). Under this project, MALAKOF will be leading the co-firing initiative at the 2,100MW TBP Plant by burning biomass along with coal. Some of the biomass fuel sources include empty fruit bunch (EFB), rice husk pellets, and wood chips. The group has completed trial burn of 0.5% co-firing with EFB in December 2022 and targets to scale up to a minimum of 15% co-firing by 2027 (Figure 4).

Potential CCGT and Solar PV Plants at Tanjung Bin

Moving forward, MALAKOF sees the possibility of redevelopment of the brownfield sites at or near TBP/TBE power plant for the generation of cleaner energy such as gas or solar energy. One of them is to replace the 2,100MW TBP plant with a new combined-cycle gas turbine (CCGT) power plant with a potential generation capacity of 2,250MW. Another option is the development of 3 sites in Tanjung Bin for a potential 124MW capacity solar photovoltaic (PV) farm. We view these potential developments positively due to the potential cross-border export of cleaner energy sources to Singapore.

Impact

No change to our earnings forecasts.

Valuation

Maintain Buy with an unchanged TP of RM0.67/share based on sum-of-parts valuation.

Source: TA Research - 27 Sept 2023