Review

• Malakoff Corporation Berhad’s (MALAKOF) 3QFY23 result came in below expectations despite registering a narrower loss from a quarter ago. 9MFY23 core net loss was RM533.1mn compared with our forecasted loss of RM331.3mn and consensus forecasted loss of RM225.8mn. The earnings miss was mainly attributed to the worse-than-expected impact of the negative fuel margin.

• QoQ: LBT in 3QFY23 narrowed to RM107.0mn compared with LBT of RM453.7mn in 2QFY23 mainly attributed to lower negative fuel margins in Tanjung Bin Power (TBP) and Tanjung Bin Energy (TBE) coal plants following the stabilisation of coal prices. The negative fuel margins at TBP and TBE were RM149.4mn (2QFY23: RM556.2mn) and RM33.0mn (2QFY23: RM14.9mn) respectively.

• YoY: Quarterly revenue dropped 32.3% YoY, driven by lower energy payment for TBP and TBE from lower applicable coal price (ACP) as well as the absence of contribution from the GB3 gas plant following the expiration of the power purchase agreement (PPA) in December 2022. The group registered LBT of RM107.0mn compared with PBT of RM280.7 a year ago, mainly impacted by negative fuel margin, lower share of associates, which we attribute to the change in accounting treatment for Shuaibah and impairment assessment carried out in Hidd power in FY22, as well as lower contribution from Alam Flora (PAT -29.8% YoY) likely driven by higher operating expenses.

• YTD: 9MFY23 revenue declined 7.8% YoY on the back of lower ACP and expiration of GB3 PPA. The group recorded LBT of RM645.1mn in 9MFY23 compared with PBT of RM575.4mn a year ago due to negative fuel margin of RM793.0mn and RM65.4mn for TBP and TBE respectively, higher insurance costs and lower share of profit from associates as mentioned above.

Impact

• After factoring in the impact of worse negative fuel margins, we trim our earnings forecasts for FY23/FY24/FY25 to -RM495.8mn/RM288.7mn/ RM303.4mn, respectively.

Outlook

• As coal price has remained relatively stable since July 2023, we believe the worst of the negative fuel margin for MALAKOF is over, evidenced by the narrower loss QoQ in the current quarter. We expect the group to turn into the black in 4QFY23.

• The environmental solutions segment continues to contribute stable profit to the group. Once the group completes the acquisition of a 49% stake in E-Idaman Sdn Bhd, we estimate that this will contribute an additional 3%-5% to the group’s bottom line from FY24 onwards.

Valuation

• Reiterate Buy on MALAKOF with an unchanged target price of RM0.75/share based on sum-of-parts valuation.

Source: TA Research - 27 Nov 2023