MALAKOF is expected to return to the black in 1QFY24 on the back of improvement in negative fuel margins. We forecast that the group will record a core profit of RM60-70mn in 1QFY24. Newcastle Coal prices have stabilised since June 2023, suggesting that the worst of negative fuel margins is over. Acquisition of 49% stake in E-Idaman should contribute additional 3%-5% to the group’s bottom-line for FY24-FY26. With escalating tension between Iran and Israel, MALAKOF’s assets in the Middle East may be at risk. No change to earnings forecasts. Maintain Buy with an unchanged TP of RM0.75 based on SOP valuation. The group currently offers an attractive dividend yield of 6.8%-8.3% for FY24-FY26.

1QFY24 Results Preview

Malakoff Corporation Bhd (MALAKOF) is expected to return to the black in 1QFY24 on the back of improvement in negative fuel margins and the absence of impairment of its Al-Hidd IWPP in Bahrain registered in 4QFY23. We forecast that the group will record a core profit of RM60-70mn in 1QFY24 (1QFY23: - RM99.3mn, 4QFY23: RM69.8mn), representing 22%-25% of our full-year forecast. Our core profit includes the impact of fuel margins.

Stabilisation of Coal Prices

The benchmark Newcastle Coal prices have stabilised since June 2023 (Figure 2), suggesting that the worst of negative fuel margins is over. In fact, fuel margin has turned positive in 4QFY23. We expect the group to register mild negative fuel margins in 1QFY24 as the Newcastle Coal prices are 15% lower on average from Nov 2023-Jan 2024 (1QFY24) compared with Aug-Oct 2023 (4QFY23).

Earnings Contribution From E-Idaman to Kick in From 2QFY24

97.3%-owned Alam Flora is expected to continue contributing stable earnings for MALAKOF. Alam Flora registered RM109.7mn PATMI in FY23 and should continue recording c.RM100mn PATMI per annum moving forward. Meanwhile, the short-term earnings boost would come from inorganic growth via the acquisition of 49% stake in E-Idaman, which is targeted for completion by April 2024. E-Idaman is expected to contribute additional 3%-5% to the group’s bottom-line for FY24-FY26.

Risk to Foreign Assets in Middle East

With the escalating tension between Iran and Israel, MALAKOF’s assets in the Middle East may be at risk if there is widening of conflict to the broader Gulf region. MALAKOF has stakes in water desalination plants in Saudi Arabia, Oman and Bahrain. These assets, forecasted to contribute c.RM134mn to share of profit in FY24 (49% of FY24 core profit), may be impacted in the unlikely event that the war of flames engulf these countries.

Impact

No Change to Earnings Forecasts.

Valuation

Maintain Buy with unchanged TP of RM0.75 based on SOP valuation. The group currently offers an attractive dividend yield of 6.8%-8.3% for FY24-FY26.

Source: TA Research - 22 Apr 2024