• Keep BUY, new MYR0.77 DCF-derived TP from MYR0.86, 13% upside with c.8% FY24F yield. Malakoff Corp’s 1Q23 results missed expectations due to its negative fuel margin. With core prices set to normalise in the upcoming quarters, the fuel margin impact may still affect its bottomline – albeit to a moderate extent. Our BUY call is largely premised on the company’s decent dividend yields and resilient future earnings, anchored by the Alam Flora contribution as well as a better plant stability.

• Below expectations. 1Q23 core net losses of MYR71m came in below expectations, due to a substantial negative fuel margin – this, in turn, was the result of the volatility in applicable coal prices.

• Results review. Revenue increased by 21% YoY in 1Q23 on the back of higher energy payments from the Tanjung Bin Power (TBP) and Tanjung Bin Energy (TBE) plants. That said, Malakoff recorded a core loss of MYR71m (vs a core profit of MYR57m in 1Q22), no thanks to a negative fuel margin impact, lower JV & associate contributions and higher operating insurance costs. This, however, was partially cushioned by lower finance costs and depreciation charges. The weaker QoQ performance (from a core profit of MYR204m in 4Q22) was also due to a negative fuel margin impact and lower JV & associate contributions.

• Outlook. As coal prices are expected to moderate going forward, we may continue to see fuel margin fluctuations affecting Malakoff’s bottomline this year. In March, the company entered into a heads of agreement with domestic private companies to develop, own, operate, and maintain three hydroelectric renewable energy plants in Kelantan. We are generally positive on the venture as, with this, its net renewable portfolio rises to c.100MW. Note that this achievement still lags behind its targets of 1000MW (for 2026) and 1,400MW (for 2031). In the meantime, Alam Flora’s performance should continue to underpin Malakoff’s earnings.

• BUY. We cut FY23-25F earnings by 6-39% to account for negative fuel margins. Our DCF-based TP drops to MYR0.77, after we rolled forward our valuation base year and applied a 10% discount, based on our revised ESG score of 2.5 for the stock, as per our proprietary in-house methodology. Downside risks: Higher-than-expected plant outages and operating expenses.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 29 May 2023