Highlights / Comment

• 7th National Energy Forum focused on sustainable energy transformation in Malaysia, which reflects government’s initiatives to promote energy security, renewable energy and energy efficiency.

• Energy Commission (EC) has been ensuring Malaysia power reserves level in check and expediting new power plants awards (PPAs) as well as extension of existing PPAs. Great efforts have been taken within ASEAN for regional interconnect power grids and power transfer from one nation to another such as Laos – Thailand – Malaysia (100MW hydro power) and Sumatra, Indonesia – Malaysia (600MW coal power) etc. EC continued to study the feasibility of connecting Sarawak – Peninsular (3,200MW hydro power).

• Renewable energy (RE) remained as government’s agenda on environmental concern. Under Malaysia 11th plan 2016- 2020, EC is targeting energy mix of 53% coal, 29% gas, 15% hydro and 3% RE (under FiT mechanism) by 2020. However FiT for solar power will end in 2017.

• EC will implement 2 new mechanisms for solar power by 2017 - Large Scale Solar (LSS) and Net Energy Metering (NEM). LSS is large scale solar plant project (>50MW capacity) for IPPs. EC is targeting for 1,000MW by 2020 (including Sabah 200MW). NEM is to incentivize households (or industrials) to build solar power, in offsetting solar power generation dispatched to the grid and electricity consumption from the grid, effectively reducing electricity consumption (cost savings). EC is targeting NEM to achieve 500MW capacity by 2020 (including Sabah 50MW).

• On energy efficiency, government is working on the implementation of smart grid and smart meter. So far, smart meter has been successfully installed for 1,000 units in Melaka and Putrajaya under a pilot project. TNB will rollout 1st phase of 300k units in Melaka (2017), follow by 2nd phase of 2m units nationwide (2018) and 3rd phase all residences nationwide (2021).

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 – 1) Continued economy growth albeit slower pace; 2) Implementation of IBR and FCPT; 3) Low energy (LNG and coal) prices; and 4) Exploration into oversea ventures for earnings growth.

• Negative – 1) RM depreciation (for TNB); 2) Stiff competitions (for YTLP – Seraya and YES); and 3) RM appreciation (for YTLP – lower translated contributions from Wessex, Seraya and other oversea ventures).

Valuation

• Maintain Buy on Tenaga with unchanged TP of RM17.50 based on DCFE.

• Maintain Hold on YTLP with unchanged TP of RM1.45 based on SOP.

Source: Hong Leong Investment Bank Research - 21 Sep 2016