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HLBank Research Highlights

Author: HLInvest   |   Latest post: Fri, 20 Sep 2019, 9:35 AM

 

Power - Cancellation of IPPs

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MESTECC announced the cancelation of 4 new IPPs. We are neutral on the cancellation as the Kapar 700MW and Paka 1,400MW were not know by the market and we have not factor in the earnings upside from these new IPPs. Hence, there is no impact to our existing assumptions and earnings for TNB as well as YTLP. Maintain OVERWEIGHT rating on the power sector with BUY recommendation on TENAGA (TP: RM17.50) and YTLP (TP: RM1.45).

NEWSBREAK

MESTECC (Ministry of Energy, Science, Technology, Environment and Climate Change) announced the cancellation of 4 awarded new IPP projects (direct award) due to violation of conditions stated in the offer letter. The cancellation is not expected to have negative financial or legal implication to the government. On the other hand, the government will save RM1.26bn in costs to supply electricity to end-users.

Tenaga has clarified that the announced IPP cancellations are new projects that are still under negotiation and have not been made public. The cancelled 700MW Kapar and 1,400MW Paka were meant for the replacement/expansion of the existing 2,420MW Kapar (60% TNB & 40% Malakoff) expiring mid-2019 and mid-2029 and 2,57MW Paka extension (TNB) expiring end-2019.

HLIB’s VIEW

Neutral. We are neutral on the announcement, as we have not assumed any contribution upside from the said cancelled Tenaga related IPPs (Kapar and Paka replacement/expansion were still unknown to the market), while YTLP has no stakes in the list of cancelled IPPs.

Potential re-tender. With the cancellation of the combined 2,800MW power generation capacity, we believe there will be re-tendering (open tender) of the capacity in the future to meet the growing power demand (especially in Sabah) and potentially higher priority for renewable energy (in tandem with the new government’s vision to increase renewable energy mix to 20% by 2030). We believe Tenaga has the competitive advantage to tender for renewable energy projects.

TENAGA (BUY, TP: RM17.50). We maintain BUY recommendation on Tenaga with unchanged DCFE-derived TP: RM17.50. Tenaga’s earnings and cash flow are expected to be stable under IBR/ICPT mechanisms. The lowered 7.3% of regulated assets under RP2 (2018-2020) will be offset by higher asset base, new contributions from associates and power plants.

YTLP (BUY, TP: RM1.45).  We maintain our BUY recommendation on YTLP with unchanged TP: RM1.45 (10% discount to SOP RM1.60). YTLP has strong underlying cash flow from its oversea subsidiaries and investments and we expect a stable dividend payout with attractive dividend yield. The accumulated treasury shares have soared up to 482.9m shares or 5.92% of outstanding shares.

Source: Hong Leong Investment Bank Research - 26 Oct 2018

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