We walked away from MALAKOF’s recent briefing more convinced of its capacity replenishment prospects premised on: (1) An increasingly pressing need to accelerate capacity additions from rapidly declining reserve margins; (2) Sizeable scheduled new capacity which has yet to be awarded; (3) A tight demand-supply condition which could lead to better returns for any potential new capacity. Reiterate Buy at unchanged SOPderived TP of RM1.05. Further upside is seen should MALAKOF successfully secure new capacity.

Pressing Need for New Capacity

Although based on installed capacity, system reserve margins stand at close to 40% on our estimates, MALAKOF argues that this includes the Kapar power plant, which, in its opinion, should be excluded from the system’s ‘reliable’ capacity calculations due to Kapar’s less-than-stellar track record. Kapar entails a capacity of slightly over 2GW, which accounts for an estimated 7% of system capacity. Excluding Kapar, the ‘reliable’ system reserve margin is estimated to stand at slightly <30% (before taking into account scheduled and unscheduled outages). At an annual demand growth of 2.5%, the system reserve margin is expected to drop below the required minimum of 20% by 2029, while if we exclude Kapar in the calculations, the reserve margin could drop <20% as soon as 2027, suggesting an increasingly pressing need to accelerate capacity additions/renewals. Our estimates already factor in the scheduled new capacity of 9.3GW up until 2030, including the upcoming 1.2GW Pulau Indah CCGT scheduled for COD in 2024 and THB Power’s 1.2GW CCGT in 2026. We reckon any delays in the COD of the planned new capacity could result in the need to extend PPAs of expiring/expired power plants.

Despite the energy transition, conventional capacity is still relevant

MALAKOF also shared its views on the energy transition against the relevance of its conventional assets. While in the long-term, the group acknowledges the need for the energy transition, the group believes conventional assets remain relevant in the foreseeable future given: (1) Solar, which is Malaysia’s largest RE resource, is still not a reliable technology given low capacity factor of ~17% and intermittence; (2) Still expensive battery storage technology; (3) Surge in demand from data centres (DC) which requires constant power supply throughout the day, even outside of solar generation hours. Tenaga Nasional has been indicating at least 5GW incremental demand from DCs over the next decade, which represents around 25% of the current peak demand of 20GW. Until battery storage becomes a more viable solution, we believe conventional capacity will remain relevant, including as a spinning reserve to compensate for RE intermittence.

Eyeing Extensions and New Capacity

Following the recent short-term extension for Prai Power, MALAKOF is eyeing more extensions for existing power plants (including coal) as well as new capacity going forward. On coal, the group argues that a coal power plant can actually operate a much longer life of up to 40 years (vs. the typical 20-30 years coal power plant PPAs). In addition, the efficiency of existing coal power plants is comparable to that of new ones, suggesting extensions as a more cost-effective option to plug capacity gaps as opposed to constructing new plants. In contrast, new-generation CCGTs entail much better efficiency compared to existing plants, making new CCGT capacity a more palatable option. To be realistic, and in the context of the current administration’s drive for the energy transition, allowing new or extending coal PPAs could be politically challenging, in our opinion. We believe there could be more emphasis on CCGTs (whether extensions or new capacity), considering gas has been outlined under the National Energy Transition Roadmap (NETR) as a cleaner fossil fuel alternative for the transition. MALAKOF is sitting on readily connected sites from previous (expired) power plants, such as PD Power in Port Dickson and GB3 in Manjung, giving it an advantage when bidding for new capacity.

Sizeable CCGT Capacity Scheduled to Come On-stream

Based on Malaysia’s last published Power Generation Development Plan, some 9.3GW of new capacity is expected to come on stream between 2024 and 2030, whereby 69% or 6.4GW comprise CCGT capacity. Around 2.4GW of the planned CCGT capacity has been awarded to Tadmax (1.2GW, majority stake later sold to Worldwide Holdings) and another 1.2GW to THB Power. However, the remaining 4GW scheduled to be operational in 2029-2030 has yet to be awarded. Given the circa 4-year lead time required for new CCGT power plants to come on-stream, we reckon there could be more clarity on these scheduled capacity within the next 12-24 months. We believe MALAKOF stands a good chance to capture this opportunity, capitalising on readily connected sites as well as having a strong track record in power plant development and operations.

Valuation

We reiterate our Buy call on MALAKOF at unchanged SOP-derived TP of RM1.05/share. We see further upside to valuations if MALAKOF successfully secures new capacity. As a yardstick, we estimate every 1GW of new capacity secured could enhance valuation by ~20sen/share, based on RM3mn-4mn/MW capex and 6%-7% project IRR. A tight demand-supply condition in the electricity market could lead to better-than-expected IRR which spells further upside. MALAKOF is currently trading at 5.2x FY25 EV/EBITDA, at par to historical mean. However, we reckon valuations could re-rate higher towards +1SD (6.1x EV/EBITDA) given the tight electricity market condition and improving prospects of capacity replenishment. The dividend yield remains attractive at 4.9%-6.0% throughout our forecast horizon.

Source: TA Research - 11 Sept 2024