MALAKOF: Earnings Miss Expectations Due to Outages, ‘Buy’ Rating Maintained with Revised Target Price

A recent investment bank research report highlighted that the company’s financial performance fell short of expectations for the nine months ended FY25, primarily due to operational setbacks. Despite the short-term challenges, analysts maintain a positive outlook, citing strong future growth prospects and a maintained “Buy” recommendation.

Performance Review

The company’s core net profit for the nine months of FY25 stood at RM153 million, representing a 21% year-on-year decline. This performance accounted for only 58% and 66% of the investment bank’s and consensus full-year estimates, respectively. The underperformance was largely attributed to an unscheduled outage at its TBE power plant, which resulted in capacity payment losses following a steam turbine crossover pipe leakage.

Additionally, lower contributions from associates, consequent to the decommissioning of the Shuaibah Water and Electricity Company (SWEC) plant, further impacted earnings. The third quarter of FY25 alone saw core earnings plummet by 56% year-on-year to RM20 million. Similarly, core earnings declined substantially quarter-on-quarter due to the unscheduled outage at TBE, lower associate earnings, and higher depreciation charges.

Impact of Operational Issues

The operational issues are expected to continue influencing the short-term financial trajectory. A fire incident at TBE in October 2025 is anticipated to incur RM100 million in capacity payment losses, based on the group’s expectation of restoring operations by year-end 2025. Repair costs for the damaged chimney and flue gas desulphurisation facility are estimated at RM25-30 million, which will be capitalized over the remaining tenure of TBE’s Power Purchase Agreement (PPA) until 2041.

While revenue loss is projected to be limited to FY25, the company’s insurance policy is expected to cover both physical property damage and business interruption losses, suggesting a potential future clawback. Consequently, analysts have revised down their net profit forecasts for FY25F-27F by 13%-56% to reflect the result underperformance and expected losses from the TBE fire incident.

Future Outlook and Growth Prospects

Despite the immediate earnings setback, the company is poised for a robust capacity replenishment cycle. It is identified as a potential front runner for the Energy Commission’s (EC) latest gas generation capacity tender, leveraging readily available sites from expiring and recently expired plants that meet the EC’s stringent commissioning requirements. The group has submitted three bids under Category I for short-to-medium term extensions of existing PPAs and is also bidding for new gas power plants under Category 2.

Beyond tenders, the company is actively negotiating with regulators to develop two new power generation assets in Negeri Sembilan and Kedah, with an aggregate capacity of 2.8GW. Furthermore, the development of a Waste-to-Energy (WTE) plant in Sg. Udang, Melaka, with a capacity of 1056 metric tons per day and 22MW power generation, is progressing, with construction slated for 2QFY26. These initiatives are expected to significantly enhance future valuations.

Recommendation

The investment bank has maintained its “Buy” rating, albeit with a slightly revised target price of RM1.29 (down from RM1.39) following the earnings revision. This represents a substantial upside of 43.1% from the last traded price of RM0.90 as per the report’s underlying analysis. The company is currently trading at 4.8 times FY26F EV/EBITDA, which is at a discount to its historical mean of 5.2 times. Analysts believe that valuations could re-rate higher towards 6.1 times EV/EBITDA, driven by a tightening electricity market and improving prospects for securing new capacity.