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.

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 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.

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