Review

• Malakoff Corporation Berhad’s (MALAKOF) 4QFY23 result came in below expectations. FY23 core net loss was RM796.2mn compared with our forecasted loss of RM495.8mn and consensus forecasted loss of RM502.3mn. The earnings miss was mainly attributed to unexpected share of loss from 40%-associate Al-Hidd Independent Water and Power Plant (IWPP) in Bahrain.

• QoQ: Excluding exceptional items including impairment loss at Al-Hidd IWPP (RM96.1mn), core loss in 4QFY23 widened to RM263.1mn compared with core loss of RM108.5mn in 3QFY23, mainly attributed to share of loss from associates despite positive fuel margin from domestic power plants. According to press release, the group would register a net profit of RM72.0mn without the impact of share of loss and impairment loss at AlHidd, suggesting that the share of loss at Al-Hidd alone is substantial at c.RM333.1mn. On the other hand, we understand that the impairment recognised was to account for the upcoming expiry of Al-Hidd’s Power and Water Purchase Agreement (PWPA) in 2027, expecting no extension beyond 2027. Recap that the group has also recognised similar impairment in 3QFY22 and 4QFY22.

• YoY: The group swung from core profit of RM203.6mn to core loss of RM263.1mn in 4QFY23 mainly driven by share of loss and impairment loss at Al-Hidd.

• YTD: FY23 core loss came in at RM796.2mn compared with core profit of RM623.4mn due to significant negative fuel margins (total of RM858.4mn at Tanjung Bin Power and Tanjung Bin Energy) reported in the first three quarters in FY23, share of loss and impairment loss at Al-Hidd, as well as expiry of GB3 gas plant’s PPA in Dec 2022.

Impact

• No change to our earnings forecasts pending analyst briefing later today.

Outlook

• Benchmark Newcastle Coal price has continued to remain relatively stable, suggesting that the worst of negative fuel margin for MALAKOF is over. This is evidenced by the positive fuel margin registered in the latest quarter. Moving forward, we expect coal price to be on a downtrend due to lower demand for coal from transition towards natural gas. Nonetheless, we expect the decrease in coal price to be gradual and hence should not lead to significant negative fuel margins experienced in 9MFY23.

• The environmental solutions segment continues to remain stable. We estimate that the acquisition of 49% stake in E-Idaman will contribute an additional 3%-5% to the group’s bottomline from FY24 onwards.

• Overall, we expect the group to return to the black in FY24 due to improvement in fuel margins.

Valuation

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

Source: TA Research - 26 Feb 2024