Review

• Malakoff Corporation Berhad’s (MALAKOF) 9MFY24 result came in ahead of our expectation but within consensus. The group’s 9MFY24 net profit of RM233.6mn accounted for 87% and 79% of our and consensus’ full year estimates respectively. The outperformance came mainly from strongerthan-expected contribution by the power generation segment, but we suspect the numbers could have been inflated by a one-off insurance claim recognition in 3QFY24.

• QoQ: MALAKOF reported a 25.1% QoQ rise in core net profit driven mainly by improved contribution from the power generation segment, which saw PAT increase by +254% QoQ despite plant outage at TBP for around two months during the quarter. We believe the reported earnings was inflated by recognition of TBE’s final insurance claim on a low-pressure turbine blade failure during the period.

• YoY: Earnings swung from a core net loss of -RM84.7mn in 3QFY23 to a net profit of RM95.2mn in 3QFY24 driven by improved contributions from TBP and TBE given absence of negative fuel margin during the period. Coal prices have stabilised, and we reckon the stability in fuel margin dynamics is broadly sustainable. However, as mentioned above, the 3QFY24 earnings was partly inflated by recognition of TBE’s final insurance claims on a lowpressure turbine blade failure.

Impact

• No change to our earnings forecasts pending an analyst briefing later today.

Outlook

• Power Generation: Newcastle Coal prices have remained relatively stable since June last year, suggesting that the worst of negative fuel margin is over. Earnings for the division may get a temporary boost from commencement of a short-term 1-year extension for Prai Power’s 350MW CCGT capacity commencing 1 September 2024.

• Based on Malaysia’s last published Power Generation Development Plan, some 6.4GW of new CCGT capacity is expected to come on-stream between 2024 and 2030. Some 4GW of the new CGGT capacity scheduled for operations in 2029-2030 has yet to be awarded. We believe MALAKOF stands a good chance to compete for it capitalising on readily connected sites from previous (expired) power plants such as PD Power in Port Dickson and GB3 in Manjung.

• For its non-thermal power generation business, MALAKOF had announced the proposed acquisition of the remaining 51% stake in ZEC Solar (owner of 29MW LSS asset in Kota Tinggi, Johor) and the remaining 49% stake in TJZ Suria (operates and maintains ZEC’s LSS asset in Kota Tinggi). The conditional period of the share sale and purchase agreement has been extended for an additional period of 3 months to 21 February 2025. Overall however, we believe the acquisition will unlikely be material to MALAKOF’s bottom-line.

• Environmental Solutions: Cut-off date for the acquisition of 49% stake in E-Idaman was extended for an additional 3 months to 28 January 2025. Once completed, E-Idaman is expected to contribute an additional 3%-4% to MALAKOF’s bottom-line for FY25-FY26. We expect segmental earnings to remain stable in 4QFY24.

Valuation

• Maintain Buy on MALAKOF at unchanged SOP-derived TP of RM1.05/share. We see further upside to valuations if MALAKOF successfully secures new capacity amid growing demand from data centres and an impending 4GW new CCGT capacity scheduled to come on-stream by 2030. As a yardstick, we estimate every 1GW of new capacity secured could enhance valuations by ~20sen/share, assuming 6%-7% project IRR. A tight demand-supply condition in the electricity market could lead to betterthan-expected IRR which spells further upside.

• MALAKOF is currently trading at 4.9x FY25 EV/EBITDA, at a discount to historical mean of 5.2x. We reckon valuations could re-rate higher towards +1SD (6.1x EV/EBITDA) given the tight electricity market condition and improving prospects of capacity replenishment. Dividend yield remains attractive at 5.6%-6.9% throughout our forecast horizon.

Source: TA Research - 27 Nov 2024