Malakoff’s Green Pursuit Will Take Time, Kenanga Keeps MARKET PERFORM

Malakoff Corporation Bhd is making the right move to fill the earnings gaps left by its expiring fossil fuel-powered power plants with cleaner utility businesses such as waste management.

“However, it takes time to grow the size of these new businesses,” said Kenanga Research in its Company Update today (Nov 21).

The research house keeps its MARKET PERFORM call and its earnings forecasts, at an unchanged SoP-derived TP of 63 sen.

The stock is supported by a decent dividend yield of more than 4%, with no adjustment to its TP based on 3-star ESG rating, it added.

“While we like Malakoff for its earnings stability underpinned by IPPs and concessions, there is room for improvement in its risk management to reduce or even eliminate unnecessary earnings volatility such as unplanned outage.

Kenanga, post-visit to Alam Flora’s Fasiliti Inovasi Kitar Semula (FIKS), a one-stop centre for the public to learn about recycling process and waste management in Putrajaya yesterday noted that the total waste in Malaysia is forecasted to grow to 19 million tonnes by 2050 (from 14 million tonnes in 2021).

“This has brought about new opportunities in the waste management sector, such as recycling, recovery and sustainable waste treatment as waste diversion in waste management solutions.

“Waste-to-energy (WTE) project is one of the keys to waste management solutions helping to covert waste into energy and reduce reliance on fossil fuels,” it said.

It noted that WTE Sungai Udang (Melaka) with a power installed capacity of 22.1MW was awarded to Malakoff on a public-private partnership (PPP) structure with a concession period of 34 years, costing a total of c.RM700 million (including RM500m EPC portion) with equity returns of 8% to 9% and the plant is expected to be ready by 2027.

Kenanga concluded that while expanding environment solutions business including the latest proposed acquisition of 49% equity stake in E-Idaman Sdn Bhd will not make a significant earnings impact in the near term, it does speak for Malakoff’ in looking for new earnings streams to replace its expiring PPAs.

“Two of its power plants had already expired recently, for example the 436MW PD Power Plant in Feb 2019 and 640MW GB3 Power Plant in Dec 2022.

“In addition, the PPA of its 350MW Prai Power Plant will expire in 2024, 1,303MW SEV Power Plant in 2027 and 40%-owned Kapar Power Plant in 2029,” it added.

The risks to the research house’s recommendation include regulatory risk, unplanned outages leading to lower capacity payment thus affecting earnings, non-compliance of ESG standards set by various stakeholders, and earnings volatility stemming from fuel margin gains or losses.

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