• Keep BUY, new DCF-derived TP of MYR1.11 from MYR0.86, 16% upside with c.5% FY25F yield. As Malakoff Corp is an experienced independent power producer (IPP), we believe it is well-positioned to benefit from the rising demand for energy over the long term. We see, too, the potential extension of power purchase agreements (PPA) on its recently retired gas- fired power plants.

• The data centre (DC) fiesta. West Malaysia’s electricity consumption growth is expected to surpass its average 10-year growth of 2.4% largely, led by the continuous expansion of DCs. We see DC energy consumption charting a CAGR of 1.6-2.6% in 2023-2035, if 3-5GW of DCs are to be fully operational by 2035. The Government has projected the reserve margin at 28-36% between 2024 and 2030.

• Potential PPA extension in the short term. To accommodate such robust demand, we understand that there is an on-going cumulated capacity of 1GW 1+1 year short-term PPAs to be awarded in the near term. We do not discount the possibility of PPA extensions on expiring gas plants. Note that MLK’s PPA on 650MW GB3 and 350MW Prai power plants expired in Dec 2022 and Jun 2024. As such, these two plants stand a chance of getting a second life – if their PPAs are extended.

• More to come in the long run? In the longer run, there should be more new gas-fired plants to be developed, which is in line with the National Energy Transition Roadmap’s (NETR) projection, where gas will continue to be the anchor – being the dominant source of fuel for baseload power. We note, however, that the gas capacity mix is projected to decline from 2025’s 42% to 2050’s 29%. This still suggests a decent growth of 9GW, ie from 19GW to 28GW. With that, we believe existing IPPs are likely to see new gas-fired plant expansions in the future following the retirement of existing coal-fired plants. MLK currently has 5.3GW of thermal capacity and targets to achieve 10GW by 2031 and, therefore, we expect them to add new gas capacity in the medium term.

• BUY. Our earnings estimates remain largely unchanged but we upgrade our DCF-based TP to MYR1.11 from MYR0.86 after ascribing a higher long-term terminal growth rate of 1% (from 0%) as we are more upbeat over its long- term prospects. Note that we have ascribed a 10% discount, based on our ESG score of 2.5. Our TP implies 15x FY25F P/E, which is at +2SD from its 5- year mean. Downside risks: Unscheduled outages, higher operating costs, and disruptions in fuel supply.

Source: RHB Research - 20 Aug 2024