Malakoff Corporation - Still Haunted by Negative Fuel Margin

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MALAKOF’s 9MFY23 results disappointed due to a higher-thanexpected negative fuel margin. However, there is room to reduce the unnecessary earnings volatility arising from fuel margin fluctuation. We project a 58% wider net loss in FY23, cut our FY24F earnings forecast by 26%, lower our TP by 5% to RM0.60 (from RM0.63) but maintain our MARKET PERFORM call.

MALAKOF’s 9MFY23 results disappointed. A net loss of RM480.0m blew past our full-year net loss forecast of RM345.6m and the fullyear consensus net loss estimate of RM225.8m.

The variances against our forecast came largely from: (i) a higher-than-expected negative fuel margin (9MFY23 of RM858.2m vs. our FY23F assumption of RM850m) at the coal fired power plants, namely Tanjung Bin Power (TBP) and Tanjung Bin Energy (TBE) as their weighted average coal cost came in higher than the applicable coal price (ACP), (ii) lower-than-expected associate incomes (9MFY23 of RM87.5m vs. our FY23F forecast of RM191.2m) due to the change in the accounting treatment for Shuaibah Water & Electricity Company and the absence of profit recognition from Hidd Power due to impairment assessment carried out in FY22.

No dividend was declared as expected as it typically pays half-yearly dividend.

YoY. Its 9MFY23 revenue contracted by 8% due to lower power generation revenue as energy payment for TBP was impacted by a lower ACP coupled with zero revenue from GB3 as its PPA expired in Dec 2022. This was mitigated by higher energy payment and capacity payment from TBE on higher despatch factor and shorter duration of plant outage. It dipped to a core loss of RM480.0m (vs. a core profit of RM467.6m in 9MFY22) largely due to a negative fuel margin of RM858.2m (vs. a positive fuel margin of RM266.0m a year ago). Not helping either was a 46% decrease in associate incomes due to the abovementioned earnings from Shuaibah and Hidd.

QoQ. Its 3QFY23 revenue declined 9% due to lower energy payments for both TBP and TBE as coal prices declined while its core loss narrowed to RM85.6m (vs. RM318.7m in 2QFY23) on a reduced negative fuel margin of RM182.2m (vs. RM571.1m three months ago).

Forecasts. We project a 58% wider net loss of RM547.0m in FY23 and cut our FY24F net profit forecast by 26% to account for: (i) a higher negative fuel margin assumption of RM950m in FY23F (vs. RM800m we previously assumed) but we maintain a negative fuel margin assumption of RM50m in FY24F, and (ii) 41% lower associate incomes each year from Shuaibah and Hidd.

However, we keep our FY23F NDPS of 3.0 sen but trim FY24F NDPS by 26% to 3.2 sen (from 4.3 sen) based on unchanged payout of 80%.

Correspondingly, we cut our SoP-derived TP by 5% to RM0.60 (from RM0.63) (see Page 3). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

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 well as fuel margin fluctuation. As such, we maintain our MARKET PERFORM call which is supported by a decent dividend yield of >4%.

Risks to our recommendation include: (i) regulatory risk, (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 2023

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