News

A consortium of SIPP, YTLP (HOLD) and TNB (BUY) has been offered a conditional award for the development of a new Combined Cycle Gas Fired Power Plant in Pasir Gudang, Johor.

Based on 1,000-1,400MW capacity, Energy Commission has imposed conditions on the technical (such as the use of only proven gas turbine technology) and commercial (levelised tariff to be comparable to TNB’s Prai CCGT in 2012) aspects of the new power plant.

The contract award method is used to fast-track the operational schedule of the new power plant by 2018 (originally targeted by 2020), in order to meet the system requirements, after the recent series of unexpected high unscheduled outages of power plants. It is also to address the fuel supply issues as well as deration of plants and transmission constraints on the nation’s power supply system.

Comment

As speculated, the new power plant was awarded based on direct negotiation, but with pre-set conditions to be comparable to the previous competitively tendered Prai CCGT won by TNB, to ensure low power generation cost.

We are positively surprised with the inclusion of TNB into the equation, which act as the check-and-balance party to ensure the new PPA only earns justifiable return on investment/equity. Note that IRR for Prai CCGT was expected at ~8%, substantially lower than 1st Generation PPAs’ of more than 15%.

Referring to TNB’s 1,070 MW Prai CCGT, the capex was RM3bn with a tariff close to 34.7sen/kwh, based on the assumed gas price of RM42.24/GJ or RM44.55/mmbtu vs. current price of RM15.20/mmbtu.

Based on IRR of 8%, the new PPA is expected to provide value-add of RM240m. However, no detail of the equity stake breakdown was provided. Should we assume similar stake by each party, TNB and YTLP will enjoy additional RM80m or RM0.14/share and RM0.10/share respectively.

Risks

Downside risks

• Surge in global energy prices (gas and coal).
• Supply shortage of energy fuel (gas and coal).
• Unscheduled power plant outage.
• Depreciation of RM.

Forecasts

Unchanged.

Rating

Overweight

Positives –

• Expect continued economy growth albeit slower pace.
• Appreciation of RM against US$.

Negatives –

• Continued natural gas supply disruption.
• Unclear fuel cost pass-through mechanism policy.

Valuation

Maintained BUY on TNB with unchanged TP of RM13.15.

Maintained HOLD on YTLP with unchanged TP of RM1.66.

Source: Hong Leong Investment Bank Research - 2 Jun 2014