As Newcastle coal prices have slid by 21.6% from the peak of US$153/tonne to US$120/tonne, we believe that Malakoff would be vulnerable to provisions for net realisable value (NRV) of coal or fuel margin losses. Although Malakoff recorded provisions for NRV of coal of RM20mil in 3QFY24 (vs. 3QFY23), we think that this may not be enough. Hence, we expect Malakoff’s net profit in 4QFY24 to be lower than 3QFY24 not only because of fuel margin losses but also due to the absence of a RM70mil insurance claim. We maintain our earnings forecast for Malakoff for now with a HOLD recommendation. Our target price of RM0.88/share is based on a FY26F PE of 14x, which is the group’s five-year average.

• Coal prices have declined. After rising in 9M2024, coal prices fell in 4Q due to higher inventories and a switch to hydropower from coal in China as rainfall rose. Currently, Bloomberg consensus forecasts average Newcastle price to be US$133.50/tonne in 2025F vs. the spot price of about US$120/tonne. When coal prices plunged by 73.9% to a low of US$121/tonne in October 2023 from the peak of US$464/tonne in September 2022, Malakoff recorded a fuel margin loss of RM564mil in FY23.
• To mitigate the impact of the fuel margin loss, Malakoff recorded small provisions for the NRV of coal in 3QFY24. We believe that the provisions are similar to fuel margin losses except provisions are made in anticipation of the drop in coal prices. On the other hand, if coal prices increase, Malakoff would be enjoying fuel margin gains. The group recorded fuel margin gains of RM566mil in 9MFY24 vs. 9MFY23.
• Alam Flora to provide recurring income. We expect Alam Flora to account for 20% to 25% of Malakoff's annual pre-tax profit. Alam Flora's profitability is expected to be underpinned by a higher volume of waste managed.
• Dividends are decent. We forecast gross DPS of 5 sen for FY24F and 5.1 sen for FY25F, which imply decent yields of 5.6% and 5.7% respectively. Dividend payout ratios are anticipated to be high at more than 80%.

Source: AmInvest Research - 21 Jan 2025