Malakoff’s financial results surprised negatively, as it slipped into a core net loss of RM75.7m in 1QFY23 as compared to net profit of RM278.7m and  RM57m in 4QFY22 and 1QFY22 respectively. Its gross margin declined significantly by 68.6% and 53.6% on a QoQ and YoY basis due to higher weighted average fuel costs for Tanjung Bin Power (TBP) and Tanjung Bin  Energy (TBE). We believe the significant decrease of Applicable Coal Price  (ACP) in 1QFY23 against the actual cost purchased from its inventory has resulted in substantially negative fuel margins for both power plants. On this note, we expect this margin compression to spill over to 2QFY23 before it recovers in 2H2023 on back of coal price stabilisation. As such, we lower our  FY23/24/25 forecast by -65.5%/-14.2%/-7.1% due to temporary setbacks. We retained our Outperform call as we continue to like the Group’s longer-term prospects, though with a lower DCF-based TP of RM0.95 (from RM1.02) after the earnings adjustment.

• High historical inventory cost. To recap, Malakoff recorded bumper profits in FY22 due to higher ACP for both TBP and TBE and its strategy in sourcing the coal in bulk earlier while the price was trending upwards in  2H2022. On further checks, we gather Malakoff booked c.RM1.2bn of coal as its inventory at year-end, which represents a level 23% higher than total fuel consumption in 4QFY22. We believe the coal was purchased when the price was at the peak at range of USD350-450/MT (Figure 1), and  subsequently utilised as fuel cost in 1QFY23, and which is expected to spill  over to 2QFY23.

• Expect significant decline of ACP in 1HFY23. Based on data as shown  in Figure 1, Coal Futures has declined significantly by 60% YTD. We  expect the ACP would track around the same quantum to the coal futures c.RM20-25/mmBtu in 1H2023. Thus, the negative fuel margin for TBP and  TBE would be extended until 2QFY23 due to lagging effects from coal  inventory purchased, against the ACP.

• Temporary setback, though with healthy cashflow and RE impetus. We believe the setbacks are temporary and expect to see this resolved in  3QFY23 on the back of coal price stabilisation. Over the longer term,  Malakoff’s assets will continue to generate healthy cashflow due to them  being concessions. It recorded RM1.2bn operating cashflow for the quarter alone owing to high cash conversion from its receivables despite this  surprise quarterly loss. We are also positive on its new venture into an  84MW hydroelectric portfolio to offset its existing coal-powered generator exposures, as part of its long-term aspiration to achieve 1,400MW in  renewable energy (RE) generation.

Source: PublicInvest Research - 29 May 2023