- We maintain HOLD on YTL Power International (YTLP) with an unchanged sum-of-parts based fair value of RM1.65/share, which implies a CY14F PE of 12x.

- YTLP announced that it has decided not to participate in the Energy Commission’s (EC) conditional offer to SIPP Energy to fast track the development of a 1,000MW-1,400MW combined gas-cycle power plant in Johor.

- Recall that the consortium members in SIPP Energy included YTLP, Tenaga Nasional and the Johor royalty. The reason given by YTLP was the ‘misconception’ arising from the direct negotiation for this fast-tracked project, which is in stark contrast with the open tender practice implemented by the EC over the past 2 years.

- We are neutral on this development, as the internal rate of returns (IRR) on this project is expected to be low; the EC requires the new power purchase agreement (PPA) be comparable to the 34.7 sen/kWh tariff rate in Tenaga’s new 1,070MW Prai power plant, which was awarded back in October 2012.

- As construction and equipment costs are likely to have escalated since then, the IRR for Project 4A is likely to be lower than the reported high single-digit levels for Tenaga’s Prai plant. Additionally, there has been strong political opposition to the resumption of direct negotiations in the award of new PPAs.

- However, the group’s exposure to Malaysian power generation earnings, which accounted for 13% of 9MFY14 profitable operations, may cease by Sept 2015 and lead to a significant absence of domestic earnings contribution. Hence, we maintain FY14F-FY16F earnings.

- YTLP’s announcement indicate that the group is still keen to participate in Project 4A if it was awarded on a competitive basis, which could delay the revised plant commencement by 2018. There remains a possibility that the EC could temporarily extend the PPA for YTLP’s power plant operations if there are any delays in the new plant-up programmes, or if electricity demand growth exceeds expectations.

- We also remain cautious on Yes losses given the group’s commitment to expand its services to 10,000 schools in Malaysia under the 1BestariNet project. There is a likelihood that the breakeven level may not be achievable after Yes achieves its targeted subscriber base of 1mil. Hence, we maintain our FY14F-FY16F numbers for now.

- The stock currently trades at a fair FY15F PE of 11x, compared to Tenaga’s 12x.

Source: AmeSecurities