One-Plus One-Year Extension for Prai

To recap, Malakoff Corporation Bhd’s (MALAKOF), 350MW Prai Power Plant was granted a one-year power purchase agreement (PPA) extension from 1 September 2024 until 31 August 2025, versus the original expiry in June 2024. It comes with an option to extend for another year subject to system requirements. At MALAKOF’s analyst briefing yesterday, management guided that capacity payment for the one-year extension is around half of the original PPA’s capacity payment of circa RM160mn per annum. At this point, there is no certainty on any potential for further extension.

To Plug Short-Term Gaps?

While we do not rule out potentially strong demand from data centres over the longer term, whereby Tenaga National has been indicating at least 5GW of incremental demand over the next decade (around 25% of current peak demand of 20GW), we note that system reserve capacity currently stands at close to 40%, well higher than the minimum requirement of 20%. Hence, the decision for the short-term PPA extension may have been to plug short-term gaps (e.g., delays in commissioning of scheduled new capacity or short-term outages of existing major capacity).

No Active Tender at Present But Abundant Plant-Up Prospects

Management clarified that MALAKOF is not presently involved in any active tenders for new conventional capacity, nor is it aware of any plans by the Government to initiate such tenders, at least at this juncture. However, MALAKOF explains that it has been in negotiations with the Government regarding proposals for a new combined cycle gas turbine (CCGT) power plant project, though there is no concrete outcome yet at this juncture. There is a total 6.4GW of new CCGT capacity expected to come on-stream by 2030 based on Malaysia’s Power Generation Development Plan (PGDP); the first 1.2GW was awarded to Tadmax Resources (since then, a majority stake of the project was sold to Worldwide Holdings), while another 1.2GW CCGT project was awarded to THB Power. Both these plants are scheduled to come on-stream in 2024 and 2026 respectively. The remaining 4GW is expected to come on-stream in 2029 until 2030 and is yet to be awarded.

Operational Improvements But Outages Towards Year-End

MALAKOF’s 1HFY24 performance was commendable driven mainly by absence of negative fuel margins and improved operational performance mainly at Tanjung Bin Power (TBP). The group’s 1HFY24 results also included a RM13m gain on land sale which we had earlier excluded from our core net profit calculation. For 2HFY24 however, MALAKOF expects several scheduled outages, between Sep-Dec 2024 involving the TBP, Tanjung Bin Energy and Segari plants. In the environment segment, the Kepong Transfer Station and Cameron Highlands Mini Incinerator contracts with the Government has expired, which led to a drop in volume of non-concession waste. However, these two concessions are small contributors to Alam Flora and hence is not expected to impact earnings.

Forecast Changes

We revise up FY24/25/26 net profit by 19.7%/27.7%/20.0% to factor in: (i) The stronger-than-expected performance of the domestic power generation division in 1HFY24 (ii) The one-year PPA extension for Prai Power Plant until 31 August 2025.

Valuation

We raise our sum-of-parts derived TP to RM1.05/share (from RM0.80/share previously) following the earnings upgrades in this report and after factoring a 3% ESG premium in accordance with our 4-star ESG rating for MALAKOF. We also lower our WACC assumption to 8.3% in our valuations to reflect improved prospects of capacity replenishment/renewal given increasing demand from data centre build-up in the country, coupled with existing plant-up plans under the PGDP. Given a more attractive return of +19.4% at our new TP, we upgrade Malakoff to Buy from Hold previously. At our revised earnings, MALAKOF is trading at 5.1x/4.9x FY25/26 EV/EBITDA, at a discount to historical mean of 5.2x. Dividend yield remains attractive at 5.1%-6.3% throughout our forecast horizon.

Source: TA Research - 30 Aug 2024