We left Malakoff Corporation Bhd’s (MALAKOF) virtual analyst briefing with the following key takeaways: i) The group is awaiting decision for Prai PPA extension; ii) Third Party Access an opportunity for plants with expiring or expired PPA; iii) Biomass co-firing progressing as planned. We lower our profit contribution assumptions from associates and trim our FY24-FY26 earnings forecasts by 19%-21%. We roll forward our base year of valuation. Upgrade to Buy with a higher TP of RM0.80/share based on SOP valuation.

Awaiting Decision for Prai PPA Extension

MALAKOF has submitted the application for the extension of Prai Power Plant’s (PPP) power purchase agreement (PPA). The group is awaiting the final decision from the authority of the results. PPP’s PPA is expected to expire around June 2024. As for the potential waste-to-energy (WTE) plant in Sungai Udang, Melaka, management disclosed that they are at the tail end of concession agreement finalisation. Meanwhile, the group’s acquisition of E-Idaman is also pending approval from Unit Kerjasama Awam Swasta (UKAS). Recap that the 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%- 5% to MALAKOF’s bottom-line for FY25-FY26.

TPA An Opportunity for Plants With Expiring or Expired PPA

The government is expected to begin implementing Third Party Access (TPA) in the national electricity supply industry from September this year, hence allowing independent power producers (IPP) to sell electricity directly to consumers. The TPA will unlikely affect MALAKOF’s existing power plants with PPA, but the opportunity lies ahead for some of the group’s plants with expiring or expired PPA such as GB3. This is a positive boost for MALAKOF as it increases the useful life of its plants and would provide recurring cash flow without being solely dependent on PPA with TENAGA.

Biomass Co-firing Progressing as Planned

On the sustainable front, MALAKOF completed the construction and commissioning of its 2% biomass co-firing installation in 1Q2024 after successful trial run of up to 0.5% in Dec 2022. The plan is to further increase the mix to 3%-5% by 2025 and achieving 15% by 2027. The group believes that insurance cost may not increase as the biomass mix is small at 15%. As for the fuel cost for biomass co-firing, it is expected to be fully pass-through, but MALAKOF is still working on the final mechanism.

Impact

Factoring in the poorer-than-expected 1QFY24 results, we lower our profit contribution assumption from associates and hence trim our FY24-FY26 earnings forecasts by 19%-21%.

Valuation

We roll forward our base year of valuation. Upgrade to Buy with a higher target price of RM0.80/share (previous: RM0.75/share) based on sum-of-parts valuation. The group currently offers an attractive dividend yield of above 6%, supported by free cash flow yield of above 20%.

Source: TA Research - 31 May 2024