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

- The Star reported today that the Energy Commission’s decision to award the concession to build and operate a 2,000MW coal-fired power plant under Project 3B has been delayed due to a tight contest between the competing bids from YTLP and 1MDB. The EC was earlier expected to announce the winner by 20 January 2014.

- While YTLP’s bid at 25.12 sen/kWh was slightly lower than 1MDB’s 25.65 sen/kWh, YTLP’s proposal would have a higher cost to Tenaga as YTLP’s proposed plant site in Tanjong Tohor, Johor was 2x-3x further from the major load centre to the national power grid compared to 1MDB’s brownfield site in Jimah, Negeri Sembilan.

- The other bidders, MMC Corp’s Malakoff Corp submitted a bid at 26.74 sen/kWh while Tenaga came in at 28.67 sen/kWh.

- Recall that the green-field plant, potentially costing RM11bil, is scheduled to commence operation in stages in October 2018 and April 2019. YTLP submitted the tender together with SIPP Power Sdn Bhd, in which the Sultan of Johor is one of the major shareholders.

- 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 foreign-controlled boiler contractor but this appeared to have been resolved.

- 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 12x, similar to Tenaga’s 12x. But these valuations are not attractive without visible growth prospects and clear dividend policy presently.

Source: AmeSecurities