Malakoff Corporation Berhad - Growth Remains Intact
Wed, 26-Feb-2025 08:12 am
by Ong Tze Hern • Apex Research

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MALAKOF (5264)

Target Price (RM)

0.940

Recommendation

Buy

Summary

  • We left Malakoff Corporation Bhd’s (MALAKOF) virtual analyst briefing with the following key takeaways:

    (i) Despite recent scheduled outages leading to EAF of 59% in 4QFY24, TBE’s UOR is at 5.08%, still below the 6% threshold.

    (ii) Negative fuel margin is expected to be mitigated by provision of coal prices to NRV. 

    (iii) Tariff adjustment for the concession business is expected in Sep 2025.

    (iv) E-Idaman acquisition expected to complete by next week.

    (v) MALAKOF is exploring refinancing options for perpetual sukuk in view of rising profit rate.

  • We adjust our FY25/FY26/FY27 earnings forecasts by -3.9%/-7.0%/-8.8% respectively, incorporating the 1%-pts annual increase in the profit rate of the perpetual sukuk. 

  • Following our earnings adjustments, we lower our TP to RM0.94 (previously RM0.96) based on SOP valuation. Maintain BUY.

 

Unfettered by Outages. Tanjung Bin Energy’s EAF stood at 59% in 4QFY24 (vs 98% in 3QFY24) due to scheduled 24-day outage from Oct-Nov 2024. The outage was a proactive inspection undertaken as a preventive measure. The latest unscheduled outage rate (UOR) is at 5.08%, still below the 6% threshold. Nonetheless, TBE made a RM29.4m Availability Target Penalty (ATP) provision in 4QFY24. The ATP mechanism allows power plants to purchase additional outage allowances if they exceed their allocated outage days. In 4QFY24, TBE purchased 14 additional outage days at c.RM2m per day, totalling RM29.4m.

 

Negative Fuel Margin to be mitigated by provision to NRV. According to management, the negative fuel margin was c.RM23m in FY24 (vs c.RM580m in FY23). Despite the downtrend in the benchmark Newcastle coal prices since the start of the year, fuel margins were positive in Jan 2025, partly supported by provision of coal prices to net realisable value (NRV) based on the Applicable Coal Prices (ACP) carried out in 2024. 

 

Tariff Adjustment Expected in Sep 2025. Alam Flora reported strong performance in 4QFY24, with PAT up 19.4% qoq and 13.5% yoy. For the full year, FY24 PAT grew 12.2% yoy. The improved performance is driven by productivity enhancements and effective cost management, including reductions in private contractor fees, staff costs and fleet management expenses. Notably, Alam Flora recorded an accelerated amortisation of goodwill (impairment of RM10.2m) in 4QFY24, reflecting a lower-than-expected tariff revision for its concession business. Tariff adjustment is expected at the start of the 3rd cycle of the concession agreement in September 2025.

 

E-Idaman Acquisition to Conclude by Next Week. The E-Idaman acquisition is targeted for completion by the end of next week. Our estimates indicate that the acquisition will contribute additional 3%-5% to the Group’s bottom-line in FY25-FY27. Beyond E-Idaman, MALAKOF is actively exploring opportunities to expand its concession waste management business. The Group is evaluating a JV with existing solid waste operators in Selangor, Penang and Labuan. Selangor and Penang have recently adopted the Solid Waste and Public Cleansing Management Act 2007 (Act 672), which aims to standardise regulations for solid waste management and public cleansing. Additionally, the Group is engaging with Terengganu and Kelantan (both yet to adopt Act 672) to explore potential concessionaire opportunities.

 

Exploring Refinancing Options for Perpetual Sukuk. The profit rate for MALAKOF’s RM800m perpetual sukuk increased by 1%-pt in 2024. Recall that the perpetual sukuk was issued in March 2017, with an initial profit rate of 5.9% per annum for the first seven years. After this period, the profit rate increases by 1%-pts annually. This means that the finance cost will increase by RM8m every year. To mitigate the impact of rising financing cost, MALAKOF is currently exploring suitable refinancing options.

 

Projects Updates. The two proposed CCGT projects (1.4GW each) are progressing well and both are expected to be finalised by the end of this year. Meanwhile, the proposed Sustainable Facility & Eco-Park Centre (SAFE) Terengganu is currently in pre-development phase, with construction set to begin in 1QFY26. The construction will take 18 months to complete and is expected to be operational in 2027. However, progress on SAFE Perak has been slower-than-expected. Following its failure to secure contracts for LSS5, MALAKOF is currently pursuing LSS5+ opportunities and expects to be more competitive in the latest tender, given the decline in panel prices and overall project costs. Additionally, MALAKOF has also submitted RFQ document for the BESS project.

 

Earnings Revision. We adjust our FY25/FY26/FY27 earnings forecasts by -3.9%/-7.0%/-8.8% respectively, incorporating the 1%-pts annual increase in the profit rate of the perpetual sukuk. Our assumption is that MALAKOF will redeem the perpetual sukuk by the end of FY27 considering that the profit rate will reach 9.9% from March 2027 onwards. We factor in perpetual sukuk distribution (not recorded within the income statement in MALAKOF’s financial reports) as part of core profit.

 

Valuation & Recommendation. Following our earnings adjustments, we lower our TP to RM0.94 (previously RM0.96) based on SOP valuation, and appraised with a three-star ESG rating. Reiterate BUY recommendation. With rising power demand in Malaysia, we believe MALAKOF is the frontrunner to secure new gas plant PPAs, given its status as the largest IPP in Malaysia.

 

Risks. Rapid plunge in coal prices, unplanned plant shutdowns, non-renewal of concession.

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