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

- The Edge Malaysia reported over the weekend that YTLP has emerged as the frontrunner for Project 3B which involves the construction and operation of a 2,000MW coal-fired power plant. The plant, potentially costing RM11bil, is scheduled to commence operation in stages in October 2018 and April 2019.

- Recall that YTLP had proposed for the project to be built in Tanjung Tohor, Johor together with SIPP Power Sdn Bhd, in which the Sultan of Johor is one of the major shareholders.

- Based on the evaluation report submitted to the board of the Energy Commission (EC) last month, YTLP was the preferred bidder give that its notional adjusted tariff of 25.2 sen/kWh was the lowest bid.

- The EC is expected to announce the winner of the bid by 20 January 2014. The preferred bidder will then complete negotiations on the power purchase agreement (PPA) with Tenaga. Earlier, there were reports of technical issues with YTLP’s foreigncontrolled boiler contractor.

- As the second closest bid was 1MDB’s proposal at a brownfield site at Jimah, Negeri Sembilan, The Edge acknowledged that result of the tender has not been finalised yet. IMDB is currently in the process of acquiring a 75% stake in the existing 1,400MW coalfired power plant in Jimah.

- We understand that the project IRR of the project over the 25-year concession is likely to be in the high single digit, unlike the over 15% for YTLP’s PPA of Paka and Pasir Gudang gas-fired power plants – which expires in September 2015.

- Assuming that YTLP has a 60% equity stake in the project, project IRR of 9%, debt:equity ratio of 80:20 and cost of funding at 6%, we estimate that Project 3B, if successfully secured by the group, could raise the group’s SOP by 9% to RM2.02/share and provide incremental earnings of RM260mil (20% of FY16F).

- As earnings will only start to partially commence in FY19F, the group will experience a 3-year gap in domestic power earnings in FY16F-FY18F. Hence, we maintain FY14F-FY16F earnings.

- The stock currently trades at a fair FY14F PE of 13x, compared to Tenaga’s 12x. But these valuations are not attractive without a clear dividend policy presently.

Source: AmeSecurities