WHAT’S NEW

The Energy, Green Technology, Science and Climate Change Ministry has cancelled four Independent Power Producer (IPP) contracts that were awarded under the previous administration, said minister Yeo Bee Yin. She said the ministry will continue to review the contracts of other IPPs. "The previous government had approved many IPP contracts through direct negotiation and direct award," said Yeo in her inaugural town hall session with energy stakeholders on Thursday. "We are reviewing the IPP contracts, especially those that bring no cost implication to the Government," she said. Separately, she said that the government wants to move forward with renewable energy (RE). In the Pakatan Harapan manifesto, the coalition pledged to increase renewable energy from the current 2% to 20% by 2025. Pakatan also pledged to reduce the dependence on coal-fired power plants which is one of the power generation methods that has a serious impact on CO2 emissions. (Source: The Star)

COMMENT:

• No more direct negotiations in the foreseeable future. The new minister stressed that there will be no more direct negotiated power purchase agreements (PPAs) in the future. This will ensure that the industry becomes competitive and players will enjoy a level playing field. While we await the announcement of IPPs that have been cancelled, some of the directly negotiated PPA that we believe may be at risk includes: a) Tadmax’s 1,000MW gas fired power plant in Pulau Indah, b) Edra’s 50MW large-scale solar (LSS) project, c) Ranhill’s 300MW gas fired power plant in Sabah, d) unlisted Tadau – said to be owned by seasoned investor Tan Sri Chua Ma Yu project in Sabah, and e) Malakoff’s partnership with Touch Meccanica to build 5 mini-hydro plants and 1 solar power plant in Pahang.
• Key beneficiary is Cypark (CYP MK/BUY/ Target: RM3.00) as a listed RE player. We expect Malaysia’s energy roadmap to incorporate a greater focus on RE. Thematically, we expect Cypark to benefit from the positive regulatory framework. By 2020, Cypark expects its RE plant capacity to jump four-fold to 120MW. Notable projects include: a) a 25MW biomass and biogas waste-to-energy (WTE) project in Ladang Tanah Merah, and b) a 30MW LSS floating project in Empangan Terip awarded under the 2nd LSS tender under Energy Commission (EC) in end-17.
• Maintain OVERWEIGHT on the sector. Key rerating catalysts include: a) TNB or IPPs such as Malakoff, YTL Power International or Edra Global Energy winning new power plant contracts from the EC; b) active capital management; and c) strong economic growth driving betterthan-expected demand for electricity.
• Our top pick is Tenaga Nasional (TNB MK/BUY/Target: RM17.70) for its good earnings visibility under the IBR framework and undemanding valuation. At our DCF-based target price, the stock would trade at 14.3x 2018F PE and 8.4x EV/EBTIDA. TNB is trading at an attractive 11.5x 2018F PE, below the market’s mid-teens valuation. Given the strong cash flow visibility under the IBR framework, we believe the valuation discount is unwarranted. Active capital management will provide scope for further share price upside.

Source: UOB Kay Hian Research - 13 Jul 2018