Malakoff Corporation’s share price has corrected by 13% since the release of its 1Q23 results where it posted net losses due to negative fuel margins.
Maybank Investment Bank (Maybank IB) said today (June 9) that while earnings should recover in sequential quarters, the Bank believes the drag to FY23E earnings (and thus dividends) is likely irreversible unless coal prices rebound sharply.
Maybank IB maintain a HOLD situation with an unchanged MYR0.60 TP.
The bank added, in the sector, they prefer YTL Power (YTLP MK, BUY, CP: MYR1.31, TP: MYR1.50).
The concept of fuel margin
Conceptually, IPPs in Malaysia do not bear fuel price risk, with the fuel component of the energy payment (revenue) received by IPPs used to cover IPPs’ fuel costs. In practice however, there can be a mismatch between the fuel payment received and the fuel cost incurred due to heat rate differences (between assumed and actual), and time lag (different fuel price during procurement and revenue recovery). It is this mismatch that gives rise to fuel margins.
Sharp fall in ACP and associate drag
In 1Q23, the applicable coal price (ACP) declined by 19% QoQ (or c.MYR195/t in absolute terms). With coal plants typically holding 1-2 months of coal inventory, the sharp decline in ACP resulted in negative fuel margins. Note that Malakoff had enjoyed positive fuel margins in FY22 when coal prices spiked. In addition, there was a further MYR15-20m/quarter drag at the associate income line in 1Q23 due to the nonrecognition of Hidd Power’s contribution (asset has been impaired).
This non-recognition of Hidd Power’s earnings will continue throughout FY23.
Minor outages in 2Q23?
Based on the regulator’s operational logs, Maybank IB notes some outages at Tj Bin Power in Apr 2023 (May and Jun logs have not yet been released). The bank’s forecasts earnings and MYR0.60 TP (based on a sum-of-parts with each entity valued on a DCF assuming 8.9% WACC) are unchanged.
Malakoff currently offer a dividend yield of c.6%.
