- We maintain HOLD on YTL Power International (YTLP), with an unchanged sum-of-parts based fair value of RM1.86/share.

- Business Times reported today that the Energy Commission (EC) is undertaking further audit on YTL Power’s equipment supplier in the group’s bid for Project 3B involving a 2,000MW greenfield coal-fired power plant. The equipment supplier is a foreign-controlled boiler contractor.

- As we had earlier reported, YTLP appears to be the frontrunner in this tender after it submitted the lowest bid of 25.12 sen per kilowatt hour (kWh) with Ranhill Power for the plant to be located in Tanjung Tohor, Johor. The second closest bid was 1MDB’s proposal at a brownfield site at Jimah, Negeri Sembilan, which apparently does not appear to be in compliance with the terms for a greenfield site.

- Malakoff, which proposed Pulau Carey in Selangor, submitted a bid at 26 sen/kWh. Surprisingly, Tenaga’s bid at Tanjung Hantu, Segari in Perak turned out to be the most expensive at 28 sen/kWh.

- In the Track 3B project, the power plant must be based on proven ultra-supercritical (USC) or supercritical (SC) technology. To ensure the plant's reliability, EC requires all equipment to have a proven track record.

- This requirement means that any unit used in the power plant must be of similar design and technology with the 5 units already in use. They must also have an output capacity of at least 700MW each and have been in successful operation for over 3 years.

- In the USC category, YTL Power's boiler contractor is untested. While the contractor had previously supplied equipment in the SC category, it had only recently won its first bid to supply USC equipment. Also, there are less than 5 boilers manufactured by the contractor that are being used in plants of 700MW and in operation for over 3 years.

- For a boiler suitable for a 1,000MW plant, design considerations have to take into account the need to use different materials; strengthening of every pipe, nozzle, joint, nut and bolt; and re-designing of mechanism to cope with higher pressures and output requirements.

- In our view, there is a possibility that competitor 1MDB, which plans to list its power assets and had submitted the second closest bid, may secure the concession for Project 3B. This means that the group’s exposure to Malaysian power generation earnings, which accounted for 17% of 1QFY14 profitable operations, may cease by September 2015. For now, we maintain FY14F-FY16F earnings.

- The stock currently trades at a pricey FY14F PE of 13x, compared to Tenaga’s 12x. These valuations are no longer appealing without a clear dividend policy presently.

Source: AmeSecurities