News

Due to competitive pressures from Tenaga and 1MDB, IPPs have been reported to submit unsolicited proposals to the Energy Commission (EC) to build power plant and supply electricity at competitive rates.

As compared to government related companies, independent IPPs (such as Malakoff and YTL Power) are at a disadvantage in terms of cheap funding cost, land ownerships and economy of scales.

Hence, IPPs are likely to lose out in the power tender programs due to the higher tariff rate required. The recent tender of Track 3A (1,000MW coal-fired plant) had shortlisted Tenaga and 1MDB. The following Track 3B (2,000MW coal-fired plant) had also shortlisted Tenaga and 1MDB along with another 3 players namely Formis Resources, YTLP and Malakoff. However, Tenaga and 1MDB was rumoured to be the front-runner for Track 3B.

Under unsolicited bids, IPPs will have to look for suitable locations (to supply to a specific industry area) as well as convincing the EC, that excess power supply to the grid at competitive rate (lower than the grid benchmark) and the additional capacity to the grid is justifiable (with the increasing power demand projections).

Comment

The changing landscape of power play in Malaysia is taking toll on the independent IPPs. IPPs will have to accept the facts of lower rate of return for new power plants, as Malaysia progresses towards developed country status, where utilities providers enjoy only ROE of below 10%.

We expect EC and Tenaga (sole distributor in Malaysia) to continue push for lower cost of power generation (especially capacity payments), in attempt to lower the impact of higher energy costs.

IPPs will need to bite the bullets of lower tariff rates and survive in the longer term (take-over smaller and inefficient players and enjoy economy of scales), in return for the strong and stable cash flow business.

Furthermore, unsolicited bids such as in Johor Pengerang and Melaka RGT, are likely to be secured by Petronas.

Risks

Downside risks –

• Surge in global energy prices (natural gas and coal).
• Supply disruption of energy resources.
• Depreciation of RM.

Forecasts

Unchanged.

Rating

Overweight

Positives –

• Expect continued economy growth albeit slower pace.
• Commencement of Melaka RGT (Stable gas supply).
• Appreciation of RM against US$.

Negatives –

Unclear fuel cost pass-through mechanism policy.

Valuation

Maintained Buy on Tenaga with unchanged TP of RM9.20.

Maintained Hold on YTLP with lower TP of RM1.66.

Source: Hong Leong Investment Bank Research - 1 Jul 2013