Malaysia Power Sector

Local media reported that the Energy Commission will announce the winner of the 1,000 to 1,4000MW Prai combined cycle power project today. Both Tenaga (Hold; RM7.00 TP) and 1MDB (not listed) are said to be the likely winners of this project. Assuming an investment cost of US$1.5m/MW for this project based on recent transactions, we estimate total investment of RM5.6bn. The project is likely to be mostly debt funded with estimated debt:equity ratio of 80:20. If TNB is the winner of the Prai power plant bid, we expect the equity portion of the project to be funded by internal cashflow and the group's net gearing to remain adequate at 0.4x after the new investment. Maintain HOLD rating for TNB on reasonable valuation and longer-term upside from PPA negotiations.

More interestingly, the outcome from the competitive bidding would be used as the benchmark for review of renewal for the existing first generation power purchase agreements (PPA) that will expire from year 2016 onwards.

The PPA extension is a win-win situation for both TNB and IPPs, as TNB will secure reliable power supply at relatively low replacement cost, while IPPs will see upside in earnings from the extension that is not reflected in their current valuations. We expect the PPAs to be extended on similar fuel cost arrangements, whereby TNB will be responsible to procure adequate fuel for the power plants. However, the agreed IRR for the new PPAs are likely to be much lower, with estimated IRR of high single-digits as compared to the high-teens under the previous agreements.

Source: HwangDBS Research - 9 Oct 2012