Review

• Malakoff Corporation Berhad’s (MALAKOF) 1QFY24 results came in below expectations. After factoring in distribution to perpetual sukuk holder (was classified as equity) and excluding exceptional items (not inclusive of fuel margin as it is not regularly disclosed every quarter), 1QFY24 core profit of RM38.8mn accounted for 5% of ours and consensus’ full-year forecasts. The earnings miss was mainly due to lower-than-expected contribution from associates and joint ventures.

• QoQ: MALAKOF experienced turnaround from LBT of RM309.8mn to PBT of RM119.8mn as 4QFY23 was impacted by substantial exceptional items such as share of loss from 40%-owned associate Al-Hidd IWPP and impairment loss of investment in Al-Hidd IWPP totalling c.RM429.0mn. Excluding the share of loss and impairment loss, PBT would be flattish QoQ. Core profit plunged 44.5% QoQ as we factored in distribution to perpetual sukuk holder recognised in 1Q and 3Q every year.

• YoY: The group swung from LBT of RM84.4mn to PBT in 1QFY24 mainly driven by greater contribution from Tanjung Bin Power (TBP) and Tanjung Bin Energy (TBE) as both plants suffered from substantial negative fuel margins in 1QFY23 compared with 1QFY24 as well as lower finance costs (-8.5% YoY).

Impact

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

Outlook

• Power Generation: Newcastle Coal prices have remained relatively stable since June last year, suggesting that the worst of negative fuel margin is over. Bottom-line for the segment should remain stable QoQ in 2QFY24 but may be affected in the following quarters once Prai Power Plant’s (PPP) PPA expire in June 2024. We estimate that PPP contributes 7%-10% of FY23 core profit (after removing impact of fuel margins).

• For its non-thermal power generation business, MALAKOF recently announced the acquisition of the remaining 51% stake in ZEC Solar (owner of 29MW LSS asset in Kota Tinggi, Johor) and the remaining 49% stake in TJZ Suria (operates and maintains ZEC’s LSS asset in Kota Tinggi). The acquisition will unlikely be material to MALAKOF’s bottom-line.

• Environmental Solutions: Cut-off date for the acquisition of 49% stake in E-Idaman was extended for 3 months to 26 July 2024. Once completed, E-Idaman is expected to contribute additional 3%-4% to MALAKOF’s bottom-line for FY25-FY26. We expect segmental earnings to be stable QoQ in 2QFY24.

Valuation

• We place our TP (RM0.75/share based on SOP valuation) and Hold recommendation under review pending analyst briefing later.

Source: TA Research - 30 May 2024