Malakoff needs a recharge

Sunday 24 Nov 2024

This article first appeared in The Edge Malaysia Weekly on January 15, 2024 - January 21, 2024

MALAKOFF Corp Bhd is among the few independent power producers (IPPs) that were granted the first-generation power purchase agreements (PPAs) — sweetheart deals that offer favourable terms and high internal rate of return to woo private investments in power generation following the nationwide blackout in 1992.

But Malakoff will see three such PPAs, the key pillars of its earnings, expiring in the next five years.

Prior to this, two PPAs — GB3 Sdn Bhd and Port Dickson Power Bhd — had already expired.

Malakoff’s managing director and CEO Anwar Syahrin Abdul Ajib jokingly says in a candid interview with The Edge, “The party has ended, tinggal karipap aje, all the nasi briyani has finished. This is where we have to start looking back, and start to rebuild.

“And the journey is from now into the next five years. It will take some time and will be very tough. People need to be patient,” he adds on a more serious note, when summing up the situation that the company is in currently.

As soon as June this year, its wholly-owned unit Prai Power Sdn Bhd’s 21-year PPA will expire. The 350MW power plant in Penang is likely to cease operations.

By 2027, the PPA for the 1,200MW power plant owned by Segari Energy Ventures Sdn Bhd, a 93.75% unit of Malakoff, will expire as well. In 2029, Malakoff’s 40% Kapar Energy Ventures Sdn Bhd, which has a 2,200MW generation capacity, will meet the same fate when its PPA expires.

This will leave Malakoff with its 90%-owned 2,100MW coal-fired power plant Tanjung Bin Power Sdn Bhd that will expire in 2031 and wholly-owned 1,000 MW coal-fired Tanjung Bin Energy Sdn Bhd, which has a lifespan of about 17 years from now and is slated to cease operations in 2041.

Abroad, Malakoff holds 40% in Al Hidd IWPP in Bahrain, which is a 929MW power plant and water desalination facility with its concession expiring in 2027; and 24% in 900MW Shuaibah Phase Three in Saudi Arabia, which will expire in 2030.

When asked if there is light at the end of the tunnel for Malakoff, Anwar — who took office in December 2020 — is quick to reply, “Oh, yes.”

In fact, Malakoff is eyeing to raise its thermal power generation capacity to 10,000MW by 2031, from just under 8,800MW currently (over 5,000MW based on effective equity holding). The group, which sold its 50% stake in a 420MW wind farm in Australia pre-pandemic for around RM1 billion, is targeting 1,400MW renewable energy capacity by the same deadline.

While Malakoff has ventured into renewable energy as part of a transformation programme, owns a 29MW large-scale solar in Kota Tinggi, Johor, and is undertaking rooftop solar for a number of related companies, the company’s future earnings seem hinged on environmental solutions via its 93.37%-owned Alam Flora Sdn Bhd, acquired in a related-party transaction (RPT) for RM945 million from DRB-Hicom Bhd in 2019.

Partnering with Rising Promenade Sdn Bhd and RP Hydro (Kelantan) Sdn Bhd, Malakoff is looking at developing, owning, operating and maintaining three small hydropower plants in Kelantan; namely Kemubu, Kuala Geris and Serasa in Kuala Krai, producing 84MW in total.

In July last year, financial close was obtained and RM975 million in debt papers was raised, marking Malakoff’s entry into the hydropower generation business.

However, many of the new businesses Malakoff is venturing into may not have great profit margins, or at least not as good as first-generation PPAs.

“The company is changing, and we have to change [with it] because the industry is changing. It’s not like before. Ultimately, we are still a listed company responsible to our shareholders.

“I need to be able to ensure that we deploy capital where it gives the best returns to shareholders. Is Malaysia the best place, or is it elsewhere? I have to gauge all of that. That’s what I’m judged by,” says Anwar.

Malakoff has been in talks with Indonesian parties looking at the IPP business, and is in negotiation with potential partners, but things are still in the infancy stage.

“It’s something that perhaps the likes of us, together with [a local giant], could hopefully work together and participate in. If there are opportunities within the Asean region, that will be of interest [to Malakoff],” he says.

M&A the way forward

Malakoff is also on the lookout for mergers and acquisitions (M&A) to cultivate future earnings growth. Towards this end, last year, Malakoff acquired a 49% stake in a solid waste management company, E-Idaman Sdn Bhd, for RM133.2 million cash from Metacorp Bhd. E-Idaman provides waste collection and disposal services for municipal waste under a 22-year concession for Kedah and Perlis.

Malakoff has set aside RM500 million to RM1 billion for M&A, according to Anwar.

He adds that apart from Malaysia, Malakoff is prioritising M&A in countries it is familiar with, namely Saudi Arabia, Bahrain and Oman, where it has established partners and knows the business terrain.

“A lot of organisations that have gone through this transition and are doing well now took 10 years [to reach that stage]. Unfortunately, sometimes people don’t have that kind of patience, so we have to look at M&A,” he says.

“I don’t want to spend too much [on deals]. I’ve got to be very careful, because I don’t know how 2024 is going to turn out.”

Judging by 2023, things could be tricky.

Financial-wise, Malakoff isn’t doing great. As at end-September last year, accumulated loss was slightly over RM1 billion. For its nine months ended Sept 30, 2023, Malakoff suffered a net loss of RM527.24 million on the back of RM6.8 billion in revenue. For the corresponding period a year ago, Malakoff raked in net profit of RM213.16 million from RM7.38 million in revenue.

Malakoff bled losses from high coal prices, which resulted in substantial negative fuel margins, as stated in its announcement. Nevertheless, coal prices eased from US$396 per tonne in January 2023 to US$128 by June 2023, adversely impacting Kapar Energy Ventures, Tanjung Bin Power and Tanjung Bin Energy.

“Malakoff will almost certainly be loss-making in FY2023 due to the hefty negative fuel margin incurred to date. This, in turn, could negatively affect the near-term dividend outlook, in our view,” wrote Maybank Investment Bank in a research note last month. It is, however, the only research outfit that has a “sell” call on Malakoff with a target price of 52 sen, compared with last Friday’s close of 65.5 sen.

According to Bloomberg, the average target price of the 12 analysts who cover Malakoff is 67 sen.

Like it or not, Malakoff has been a laggard despite the growing interest in energy stocks, particularly renewable energy producers, over the past two years.

Since end-June last year, the company’s stock has gained almost 18% and closed last Friday at 65.5 sen, translating into a market capitalisation of RM3.2 billion. Its net asset per share was at RM1.02 as at end-September 2023. The IPP was relisted on Bursa Malaysia at RM1.80 per share in 2015.

Nonetheless, UOB Kay Hian is among those with a more positive view on Malakoff, with a target price of 70 sen.

“The stock trades at an attractive single-digit price-earnings ratio (PER) versus five-year average PER of 13 times. We gather that Malakoff will continue to pay out dividends from profits at the company level. We project a net dividend per share of 4.5 sen to five sen per share over 2023-2024,” wrote UOB Kay Hian in a report dated November 2023.

At its close last Friday, Malakoff’s dividend yield was 6.03%, having paid 5.25 sen in 2022 and 5.1 sen in 2021.

On dividend payments, Anwar says, “We will be consistent. But at the end of the day, we have to make tough decisions. Can people accept the tough decision that we feel is the right thing to do?

“There’s only so much money you can borrow. If you are going to leverage, you want to use it on something that is productive for the future. It’s a discussion that I need to have with the board and hear what they say,” he comments.

Malakoff’s cash balances stood at RM2.29 billion but its current liabilities amount to RM1.06 billion plus long-term borrowings of RM8.09 billion. Net operating cash flow for the nine months ended Sept 30, 2023, was RM1.02 billion.

With the expiry of the PPAs, Malakoff Power Bhd — a wholly-owned unit of Malakoff that undertakes the operations and maintenance of power plants — will generate less.

A check on the Companies Commission of Malaysia (SSM) website reveals that for its financial year ended December 2022, Malakoff Power raked in RM9.04 million in after-tax profits from RM337.53 million in revenue. In 2018, it chalked up after-tax profits of RM76.75 million from RM454.36 million in revenue.

Anwar says the void from the power generation sector, in which some of the PPAs are expiring, is to be filled by Alam Flora.

“That’s why we are going to E-Idaman, looking for more [such businesses]. Credit must be given to the [Malakoff] board for making that decision at that point in time [to buy Alam Flora], and sticking by it no matter what people say, right?” Anwar asks rhetorically.

The acquisition of Alam Flora from DRB-Hicom drew massive flak as it was an RPT.

Tan Sri Syed Mokhtar Albukhary controls 55.92% of DRB-Hicom and wholly owns MMC Corp Bhd, which controls 38.45% of Malakoff. Syed Mokhtar is known to have a penchant for RPTs, but truth be told, this acquisition of Alam Flora by Malakoff may be one of the better ones.

Alam Flora, largest environmental company

Alam Flora has the mandate to undertake waste management services in Kuala Lumpur, Putrajaya and Pahang. With E-Idaman, it will also have a foot in the waste management of Kedah and Perlis.

According to Malakoff’s annual report, Alam Flora manages 5,748 tonnes of solid waste on a daily basis, or 2.1 million tonnes of waste annually, making it the largest environmental company in Malaysia.

Both Alam Flora and E-Idaman’s concessions expire in August 2033.

Alam Flora Environmental Solutions Sdn Bhd, a wholly-owned subsidiary of Alam Flora, offers facility management, infrastructure cleansing and waste solutions, waste management facilities, and marine and scheduled waste facilities to corporations, government agencies and institutions.

For its financial year ended Dec 31, 2022, Alam Flora chalked up after-tax profits of RM103.44 million from RM869.35 million in sales. Over the last five financial years, Alam Flora’s best results were in FY2021, when it raked in RM227.27 million in after-tax profits from RM827.51 million in revenue.

As at end-December 2022, Alam Flora had total assets of RM731.51 million while its total liabilities were RM521.5 million.

How much Malakoff grows Alam Flora remains to be seen.

Prai Power managed to register after-tax profits of RM35.37 million from RM192.78 million in revenue for its financial year ended December 2022.

Kapar Energy Ventures, in which Malakoff has 40% equity interest, chalked up after-tax profits of RM247.98 million from RM4.31 billion in revenue for its financial year ended Dec 31, 2022. In FY2021, Kapar Energy Ventures registered an after-tax profit of RM36.86 million from RM1.38 billion in sales. From FY2018 to FY2020, Kapar Energy Ventures suffered losses.

Segari Energy Ventures has been loss-making for the past five financial years.

Taking watchful steps into the transition

As a major player in the power industry, Malakoff Corp Bhd’s foray into renewable energy (RE) appears less aggressive than that of its peers.

Out of 5gw of generation capacity, Malakoff has a 29mw large-scale solar (LSS) project and 23mw of rooftop solar installed as at end-2022. This is on top of one upcoming 22.1mw waste-to-energy (WTE) project in Melaka to complement its existing waste management and power generation business, as well as its maiden hydro project in Kelantan totalling 84mw that is in the works.

According to its managing director and CEO Anwar Syahrin Abdul Ajib, Malakoff is just as hungry as its peers for opportunities in the segment, including the often-highlighted solar generation segment. At the same time, Anwar emphasises that there needs to be more clarity on certain mechanisms, and that the segment should be approached differently.

“We are [a] serious [player]. I mean, if you give us 1gw, we’ll do it,” says Anwar during his interview with The Edge. “It’s always about the size … You cannot just masukkan [include everyone in the same category]. It is like football matches — there’s the premier league, leagues one, two, three … Can you imagine if they put everyone in the same group, wouldn’t there be chaos?” he says.

“When you look at trying to ramp up [to] 100mw, 200mw, look at the players who can actually do so … Let us prosper together … It should not be an environment where only the fittest and strongest, who can hold his breath the longest, survives,” he adds.

Having started with larger solar projects, the government has opted for smaller awards of up to 30mw to bring new players into the picture. There are successes; at the same time, some companies are having trouble completing their projects after winning them at rates that were too low.

Last year, the government revisited large-scale projects with the announcement of a 1gw solar park by Itramas Corp Sdn Bhd and UEM Group, as well as 500mw capacity solar parks led by Tenaga Nasional Bhd in the National Energy Transition Roadmap (NETR).

The NETR also intended to focus on rooftop solar, although details have been scarce on new mechanisms — just as the industry awaits clarity on the RE exports mechanism ahead of Singapore’s plan to buy RE from outside the country beginning 2027.

“The mechanisms must be in place fast, so that we can actually start talking to off-takers. Let’s say we’re going to have a market exchange. Tell us soon please [how it will work].

“I don’t know what the wheeling charges are. How much [capacity] are you allocating to [local] players? What are the country’s needs, from the RE perspective, before we can actually export?” Anwar comments.

Furthermore, he sees it as crucial to balance the energy mix for the purpose of Malaysia’s continued energy security.

While the government is targeting 70% RE installed capacity by 2050, Anwar points to the intermittent nature of RE and costly battery storage. “We’d like to see a more pragmatic transition. It cannot be like a switch-off situation; you cannot just simply switch on and off [baseload plants].

“If I have a problem with the sun because the cloud cover is high, I’d still have gas [to generate power]. If I’ve got a war going on, I can still have my coal [generated power]. In Europe, not everyone switched off their coal [plants] … the diversification strategy is very important.

“So, it has to have a good mix of fuel sources, to ensure that the light bulbs would still be on all the time. For me, that is paramount. Right now, we’re taking it for granted,” he says.

‘Lots of opportunities’ in environmental solutions

For Malakoff, instead of sitting idle while waiting for clarity on the RE industry, it is now eyeing a larger share of the waste management and environmental solutions pie, which Anwar believes has helped to plug the gap left by the group’s expired power generation contracts (see main story).

“Waste is money,” Anwar says. “As we move along, the volume of waste that’s being generated by the population is getting bigger.

“You look at the likes of Veolia [Environnement SA with its €20 billion (RM102 billion) market capitalisation] … Waste Management Inc (US$72 billion or RM335 billion), Republic Services Inc in the US (US$51 billion), these are big organisations,” he adds.

Indeed, the amount of waste produced in Malaysia has nearly doubled in the last 10 years.

With Alam Flora and E-Idaman under its belt, Malakoff has waste management concessions in three states and two federal territories up until August 2033. Alam Flora collected two million tonnes of waste in 2022, while E-Idaman’s waste collection was estimated at over 540,000 tonnes in 2023.

In FY2022, E-Idaman made a profit of RM27.75 million, on revenue of RM292.61 million. In the three years from FY2020 to FY2022, Alam Flora’s profit averaged RM142 million, or 16% of the group’s profit after tax before eliminations.

In the southern states of Melaka, Negeri Sembilan and Johor where around 1.8 million tonnes of waste were produced in 2022, waste management is handled by SWM Environment Sdn Bhd, in which the Employees Provident Fund (EPF) has a 35% stake while Taliworks Corp Bhd holds another 35%. SWM booked a net profit of RM168.75 million in FY2022, from RM213.75 million the year before.

Opportunities are also present in Penang, Perak, Selangor, Kelantan and Terengganu, where the states manage solid waste through local councils. As an example, in Selangor, where state-owned KDEB Waste Management Sdn Bhd is responsible for the collection, an estimated 2.5 million tonnes of waste are handled each year.

The concessionaires are paid based on the number of households they serve, not the tonnage of waste collected. This means the concession business is a proxy for new property development projects, which analysts expect to grow by 2%-3% per annum in the medium term in Alam Flora’s case.

The concession fee has been set at RM8 per household since 2011. It is understood that the fee was unchanged in its first review in 2018. It is reviewed every seven years.

For Alam Flora, the concession business contributed to 87% of its revenue and 98% of its profit in FY2022, according to a note by MARC Rating.

It also operates other non-concession businesses such as private waste collection and cleansing services, as well as recycling activities, which MARC expects could contribute around RM259 million in revenue by FY2026, from RM114 million in FY2022, out of its total revenue of RM872.8 million that year.

“For me, there are a lot of opportunities when you start to look at it in small bits … Plastic alone [dumped into the landfills globally each year] is worth about US$1 billion to US$2 billion. From [waste] segregation, some we can actually recycle, some can be used for composting purposes, and the rest may be burned,” says Anwar.

‘Give good headroom’ to industry for WTE venture

As an extension of the environmental solutions venture, Malakoff is also working hard towards securing all necessary agreements for its upcoming 22.1mw WTE plant, which analysts say would cost RM760 million.

The industry has seen several WTE projects in the pipeline. Among those completed are Cypark Resources Bhd’s 19.73mw plant in Negeri Sembilan and Berjaya Corp Bhd’s 12mw plant in Selangor, within its Bukit Tagar sanitary landfill.

Others include the 58mw plant in Rawang via a partnership between YTL Power International Bhd and KDEB Waste Management. Another Selangor state-linked outfit, Worldwide Holdings Bhd, has three WTE projects in the pipeline: two in Selangor and one in Johor.

Commenting on the foray — WTE is relatively new to Malaysia, and past projects have seen hiccups due to the moist and unsegregated nature of Malaysia’s solid waste — Anwar made it clear that Malakoff “does not like to fail” and is aware of the associated risks.

“Our wish is this: give good headroom, because things may happen … Let’s make it work, and after that improve on it,” he says.

“We will be an open book, for example,” he adds. “Everybody is taking risks. And the biggest risk-takers are us [project developers] and the banks.”

Apart from WTE, more innovation needs to be done to drive Malakoff’s environmental sustainability agenda, such as increasing its recycling rate to 15%-20% by 2025, from single digit currently; and biomass co-firing in its coal plants.

Looking back, Malakoff started as a plantation outfit in 1975 and ventured into power generation 19 years later in 1994 with roaring success. It has been another 29 years since, and time will tell whether its pivot towards the sustainability-linked business will translate into another successful transformation for the company.

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