MALAKOF: Power Sector Earnings Rebound on Inventory Adjustments, Faces PPA Expiry Risks

A major power producer saw its net profit rebound significantly in the second quarter of FY25, primarily driven by a reversal of coal inventory provisions. However, the company continues to navigate challenges related to softer capacity utilization and the impending expiry of key Power Purchase Agreements (PPAs).

Performance Review

For the second quarter of FY25 (2QFY25), the company’s net profit surged by 84.8% to RM62.8 million. This strong rebound was largely attributed to a write-back of RM83 million in provisions for the Net Realisable Value (NRV) of coal inventories, which stabilized after a RM45 million provision in 1QFY25. Despite this quarterly strength, the first half of FY25 (1HFY25) saw core net profit at RM96.8 million, remaining within both internal forecasts and consensus estimates. This 1HFY25 performance reflects a 32.2% year-on-year decline, primarily due to a net fuel margin loss of RM50 million.

The waste management division, Alam Flora, demonstrated robust performance, with its net profit rising by 6.6% year-on-year to RM65.4 million in 1HFY25. This was bolstered by a higher volume of waste managed in the non-concession segment, leading to an improvement in net profit margin to 14.5% from 13.9% in the prior year.

Operational Challenges and Risks

Despite the positive earnings rebound, the power sector operator experienced a 3.7% year-on-year ease in capacity income, settling at RM935 million in 1HFY25. Specifically, capacity payments for the Prai power plant saw a significant 45.2% year-on-year reduction to RM40 million, largely due to tariff cuts, even with a PPA extension.

A primary risk factor highlighted in the AmInvestment Bank report is the potential loss of earnings stemming from the expiry of Power Purchase Agreements (PPAs). The PPA for the Prai plant (350MW) is set to expire in August 2025, while the Segari power plant’s (1,303MW) PPA will conclude at the end of FY27F. Non-extension of these agreements poses a considerable threat to future earnings.

Future Outlook and Recommendation

Looking ahead, the company anticipates a decline in fuel margin losses as coal prices have shown an upward trend. The sustained strong performance from the Alam Flora waste management division is expected to be a positive contributor. However, the impending PPA expiries for its major power plants remain a significant factor for the company’s long-term outlook.

AmInvestment Bank maintains a “HOLD” recommendation on the stock, with a target price of RM0.88 per share. This target price is based on a FY26F Price-to-Earnings (PE) multiple of 14x, which represents the group’s five-year average.