Malakoff Corporation Berhad: A Recovery Story with Strong Potential

Malakoff Corporation Berhad: A Recovery Story with Strong Potential

Overview:

Malakoff Corporation Berhad (MLK MK) is a leading independent power producer (IPP) in Malaysia with a diversified portfolio spanning thermal power generation, renewable energy, water desalination, and environmental solutions. The company has seen a notable recovery in its financial performance, driven by improving plant performance, stable coal prices, and robust demand for power in Malaysia. Malakoff’s growth outlook is supported by new power plant developments and an improving financial position.

Recommendation and Target Price:

• Recommendation: ADD (Reaffirmed)
• Target Price: RM 1.30 (up from RM 1.00)
• Current Price: RM 0.92
• Potential Upside: 41.3%
• Broker: CGS International
• Date of Recommendation: September 9, 2024

Key Investment Highlights:

1. Recovery in Core Earnings:

Malakoff’s core earnings have rebounded significantly in recent quarters, turning from a loss of RM 166 million (1Q23 to 3Q23) to a profit of RM 72 million (4Q23 to 2Q24). This recovery was driven by:

• Stable coal prices, which reduced fuel margin distortions.
• Improved plant performance, with higher capacity factors leading to incremental revenues.
• Operational efficiencies, with better plant availability and lower downtime.

The company’s cash flows have also improved, with a strong recovery in EBITDA and operating cash flow, reflecting the positive turnaround in its core power generation business.

2. Strong Power Demand Driving Growth Prospects:

Power demand in Peninsular Malaysia has grown 3.2% to 9.6% YoY in 2Q23 to 2Q24, far exceeding the historical growth rate of 1.2% CAGR (2017-2022). This surge in demand is expected to fuel Malakoff’s growth, with the company eyeing new capacity awards for gas plants to meet the rising demand.

Key developments include:

• Restarting gas plants (Prai and Panglima) to address supply gaps caused by retiring plants.
• Advanced discussions for two new gas plants with a combined capacity of 2.8 GW in Kedah and potentially Port Dickson.

These new projects will strengthen Malakoff’s portfolio, which currently stands at 6 GW of majority-owned power assets in Malaysia.

3. Earnings and Cash Flow Outlook:

Malakoff’s earnings outlook for FY24-25 has been revised upward by 15-17% due to stronger plant performance and higher power demand. Key assumptions include:

• The commissioning of a new 1.4 GW gas plant by 2030.
• The development of an 84 MW hydro plant in Kelantan, expected to come online in 4Q26.

The company’s Free Cash Flow (FCF) has also improved, supporting the resumption of dividend payments. Malakoff’s dividend yield is projected to increase to 5.94% in FY24 and beyond, making it an attractive option for income-seeking investors.

4. Low Valuation Despite Recovery:

Despite the recovery in earnings, Malakoff’s valuation remains low, with the stock trading at 4.1x EV/EBITDA for FY24, which is at the lower end of its 8-year historical range. The stock offers a potential 41% upside, with a target price of RM 1.30 based on a DCF valuation (WACC: 8.3%, TG: 0%).

The company’s strong earnings recovery, dividend resumption, and growth in power demand make it a compelling investment opportunity, especially given its low valuation.

Valuation and Financial Projections:

Financial Summary (FY23-FY26):

Malakoff’s revenue is expected to stabilize in FY24-25, with EBITDA growth driven by improved plant performance and new power plant projects. Net profit is expected to rebound to RM 278 million in FY24, and dividends are projected to grow as free cash flows normalize.

Risks to Consider:

• Fuel Margin Volatility: Malakoff’s earnings can be affected by fuel margin distortions if there are significant fluctuations in coal or gas prices, which could impact its profitability.
• Unplanned Plant Outages: Any unplanned outages or operational issues at its power plants could affect Malakoff’s ability to meet power demand and generate revenues.
• Regulatory Changes: Changes in energy policies or regulations in Malaysia could impact Malakoff’s future earnings and its ability to secure new power plant contracts.

ESG and Sustainability Initiatives:

Malakoff has launched its Malakoff 2.0 Strategic Transformation plan to integrate Environmental, Social, and Governance (ESG) considerations into its business. The company has set ambitious sustainability targets, including:

• Net Zero Emissions by 2050.
• Reducing greenhouse gas emissions intensity by 30% by 2031 (from a 2019 baseline).
• Expanding its renewable energy (RE) portfolio, with a goal of 1,400 MW of effective RE capacity by 2031.

Malakoff is also actively involved in biomass co-firing and hydrogen/ammonia feasibility studies to decarbonize its thermal power plants. The company is seeking to expand into solar, hydro, and waste-to-energy (WTE) projects to diversify its energy mix and reduce its environmental impact.

Conclusion:

Malakoff Corporation Berhad is on the path to recovery, with improving earnings and cash flow, driven by better plant performance, stable coal prices, and rising power demand. The company’s strategic focus on new power plant projects, renewable energy, and environmental solutions positions it well for long-term growth. With an attractive dividend yield and significant upside potential, Malakoff offers a compelling investment opportunity.

The target price of RM 1.30 offers a 41% upside, making Malakoff a strong buy for investors looking for exposure to the power generation and renewable energy sectors in Malaysia.

Thank you