MALAKOF: Operational Headwinds Lead to ‘Trading Sell’ Despite Q2 Earnings Beat

Malakoff Corporation Berhad reported a core profit after tax and minority interests (PATAMI) of
RM62.8 million for the second quarter of financial year 2025 (2QFY25), representing a robust 84.8% quarter-on-quarter
increase. This strong performance was primarily attributed to the reversal of net realisable value (NRV) provisions for
coal inventories, benefiting from favourable coal price developments. However, the first half of FY25 (1HFY25) core
PATAMI of RM96.8 million fell significantly below expectations, constituting only 40.5% of TA Securities’ forecast
and 36.9% of consensus full-year estimates. On a year-on-year basis, 2QFY25 core PATAMI declined by 21.6%.

Operational Challenges Dampen Outlook

Despite the strong quarterly PATAMI, the underlying operational landscape presented significant challenges.
Coal-fired power plants experienced a 10.3% year-on-year (YoY) drop in energy payments,
even with a 9.0% YoY increase in energy dispatch. This was primarily driven by a 14.4% decline in the average
Applicable Coal Price (ACP) to RM20.6/mmBtu from RM24.0/mmBtu in 2QFY24. The lower ACP was in line with global
coal price trends, exacerbated by a surge in China’s domestic coal production and a substantial contraction in
seaborne coal imports, placing downward pressure on regional benchmark coal prices and impacting fuel margins.

Similarly, gas-fired power plants recorded a sharp 68.6% YoY decrease in energy payments,
alongside an 82.8% YoY decline in energy dispatch. This occurred despite a stable 1.4% YoY growth in system
demand in Peninsular Malaysia. The weaker dispatch stemmed largely from merit order effects, where lower
generation cost coal plants were prioritised over gas in the dispatch curve. The lower ACP further reduced
the relative cost of coal generation, intensifying the disadvantage for gas.

Future Prospects and Revised Recommendation

Near-term prospects for Malakoff are clouded by expectations of continued subdued energy demand in Peninsular
Malaysia and persistently low ACP. These factors are projected to maintain pressure on the company’s earnings
performance. While there are positive developments such as bids to extend Power Purchase Agreements (PPAs) for three
gas-fired plants (Prai Power, GB3, and Segari Energy Ventures), alongside proposed developments of two new
greenfield CCGT projects and securing Large Solar Scale 5+ initiatives, these are currently overshadowed by
the prevailing operational headwinds.

In light of these near-term risks, TA Securities has revised its earnings forecasts downwards for FY25F/26F/27F
by -25.9%, -9.7%, and -5.9% respectively. Consequently, the firm has downgraded its recommendation
to Trading Sell from Neutral, while maintaining an unchanged target price of RM0.82.