Investment Highlights

• We downgrade Malakoff to HOLD from BUY as its share price has exceeded our DCF-based fair value of RM0.75/share (WACC: 7.5%). Our fair value implies a FY25F PE of 13.6x. We ascribe a neutral 3-star ESG rating to Malakoff.

• Although Malakoff is expected to benefit from third-party access to electricity supply in September, we believe that it would take time. Malakoff would have to introduce attractive pricing packages to entice consumers and negotiate with Tenaga Nasional (TNB) on tolling charges for the use of transmission lines. Recall that the government plans to allow consumers to buy electricity directly from the independent power producers in September 2024.

• On an annualised basis, Malakoff’s 1QFY24 net profit of RM62.2mil was within our forecast and consensus estimates.

• The group swung into a net profit of RM62.2mil in 1QFY24 from a net loss of RM75.7mil in 1QFY23 due to the absence of fuel margin losses. Recall that Malakoff recorded a fuel margin loss of RM109mil in 1QFY23.

• The fuel margin loss arose as coal, which were purchased at high prices in FY22, had to be marked-to-market at lower prices. Malakoff’s fuel margin losses amounted to RM564mil in FY23.

• Alam Flora’s net profit rose by 4% YoY to RM29.9mil in 1QFY24 due to higher non-concession jobs, which command better margins. Net profit margin edged up to 13.6% in 1QFY24 from 13% in 1QFY23.

• Prai Power Plant’s PPA (power purchase agreement) is expected to expire in June 2024. Prai, which has a capacity of 350MW, accounted for 8% of Malakoff’s capacity payments in FY23.

• We believe that Malakoff would seek approval for Prai’s PPA to be extended. If not, the group would sell the plant and equipment of the facility. We have already accounted for the loss of Prai’s earnings in Malakoff’s FY25F net profit.

• Malakoff is currently trading at a FY25F PE of 13.7x, which is marginally below its 2-year average of 14x.

Source: AmInvest Research - 30 May 2024