Malakoff Corporation Bhd could have a strong free cash flow (FCF) generation once its earnings normalise on the back of more stable coal prices, which can contribute to the prospect of higher dividends over the next two years.
CGS-CIMB believes value has emerged following Malakoff’s 16% share price correction since mid-April 2023, with the stock currently trading at close to its all-time low of RM0.57 in June this year.
The research house finds Malakoff’s valuations attractive at just 3.9x 2024F EV/EBITDA, which is more than 1 s.d. below its 8-year mean.
CGS-CIMB said it projects FCF yields of around 18% for 2024F and 2025F, which we believe can sustain dividend payouts of 95% (average payout over 2017-2022 was 95%), translating to a 2024F-2025F net yield of 7-8%, based on the current share price.
“We forecast FCF (excluding distortions from working capital) to expand from RM400 million in 2023F to a more normalised average run rate of RM1.3 billion in 2024F and 2025F.
“As such, we see the prospect of higher dividends over the next two years from a cut in 2023F,” it said.
The research house maintains its DCF-based TP of RM0.80 (WACC: 9.2%; TG: 0%) as its longer-term forecasts remain largely unchanged.
CGS-CIMB said although the group’s earnings delivery is disappointing this year, it is set to rebound in 2024F-2025F.
“Admittedly, earnings delivery has been disappointing this year, with the company reporting significant losses in 9M23, mainly due to the negative fuel margin arising from the mismatch between the calculations of energy payments and fuel costs.
“After collapsing by 68% from a high of US$413/MT in 3Q22 to US$134/MT QTD, coal prices appear to have normalised to a large extent and the sharp movements appear to have moderated,” it said.
It estimates Malakoff will record a 2023F normalised net loss of RM534 million versus its previous forecast of RM266 million net profit, after treating fuel margins as part of core operations.
“As such, we estimate estimates for 2024- 25F remain largely unchanged as we do not expect sharp fluctuations in coal prices and hence have not assumed any fuel margin in our forecasts.
“As a result, we expect earnings to rebound to a net profit of RM243 million in 2024F and RM262 million in 2025F. Beyond 2025F, there is earnings upside potential from the 84MW mini-hydro plants in Kelantan, waste-to-energy facility in Melaka, gas-fired power plants and potential new solar projects,” it said.
CGS-CIMB added alongside the recovery in earnings that we project going into 2024F, it expect cashflow generation from operations to improve, which should in turn lead to a revival of dividends.
Key re-rating catalysts include earnings accretive renewable evergy (RE) capacity expansion and a recovery in dividends going into 2024F.
Downside risks include negative fuel margins remaining persistently high and unplanned plant outages.
