MALAKOF's 9MFY24 results came below expectations as higher operation and maintenance (O&M) costs crimped its 3QFY24 earnings. Nonetheless, amid stable coal prices, we no longer expect a negative fuel margin shock in the immediate term. We trimmed FY24 earnings forecasts by 12% to account for the higher O&M costs but maintain our MARKET PERFORM rating with a slightly lower TP of RM0.81.

3QFY24 result below expectations. MALAKOF's 9MFY24 core profit of RM179.6m missed expectations, at 63%/61% of house/street's full- year forecasts. The variances against our forecast came largely from higher-than-expected O&M costs in 3QFY24. As expected, no dividend was declared during the quarter as it usually pays half-yearly dividend.

Higher O&M cost hit sequential earnings trend. While revenue dipped 4%, 3QFY24 core profit contracted 60% QoQ to RM33.7m due to the said higher O&M costs coupled with higher net realisable value provision for coal inventories. The lower topline was partly due to lower energy payment arising from Tanjung Bin Power's (TBP) major plant outage from 28 Jun to 01 Sept. The reported net profit is inclusive of the RM70m settlement of Tanjung Bin Energy's (TBE) final insurance claims on low-pressure turbine blade failure previously.

Previous year's results badly affected by fuel margin. 9MFY24 revenue was flattish at RM6.81b, MALAKOF reported core profit of RM179.6m in 9MFY24 vs. RM480.0m core loss in 9MFY23 which was due to huge negative fuel margin of RM858.2m vs. RM100.0m this year.

Forecasts. We trimmed our FY24 net profit forecasts by 12% to account for higher O&M costs incurred in 3QFY24. However, there is no changes to our FY25 earnings estimates. Correspondingly, FY24 NDPS is also cut proportionally based on unchanged pay-out ratio of 80%.

Valuations. Post earnings revision, our SoP-derived TP is reduced slightly to RM0.81 (see Page 3) from RM0.82. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. While we like MALAKOF for its earnings stability, underpinned by IPPs and concessions, there is room for improvement in its risk management to reduce or even eliminate the unnecessary earnings volatility such as from unplanned outages. As such, we maintain our MARKET PERFORM call which is supported by a decent dividend yield of 5%.

Risks to our recommendation include: (i) regulatory risks, (ii) unplanned outages leading to lower capacity payment thus affecting earnings, (iii) non-compliance of ESG standards set by various stakeholders, and (iv) earnings volatility stemming from fuel margin gains or losses.

Source: Kenanga Research - 27 Nov 2024