The new Energy, Green Technology, Science, Climate Change and Environmental Minister, Yeo Bee Yin has indicated to cancel 4 new IPPs and review another 4 new IPPs that were directly awarded by previous government. We expect immaterial impact to TENAGA (low risk of being one of the 4 IPPs and unlikely material change to its existing IPPs if under review) and YTLP (no new IPP). Maintain OVERWEIGHT rating on the power sector with BUY recommendation on TENAGA (TP: RM17.50) and YTLP (TP: RM1.25).

NEWSBREAK

Newly appointed Energy, Green Technology, Science, Climate Change and Environment Minister, Yeo Bee Yin has decided to cancel 4 new IPP contracts and review another 4 new IPP contracts awarded by the previous government. However, the IPP’s identities were not revealed.

Yeo mentioned that the cancelations are expected to be ratified by the Cabinet next week, are "not needed" and will not incur the government any extra compensation cost. “These are the 4 that the Ministry has identified can be cancelled, as they are the easiest to cancel,” Yeo said. She said that only 1 of the 4 firms who won the IPP deal is a public listed company.

The other 4 IPPs are under review to determine the viability and costs involved. A decision regarding them could also be made in the coming week. Looking ahead, Yeo said her ministry will only go through open tender for future projects.

HLIB’s VIEW

Neutral. We are relatively neutral on the announcement, as we do not expect the review/cancellation to have material impact to utility companies under our coverage i.e. TENAGA and YTLP. The indication of only one public listed company involved under the list of cancellation is most probably related to Tadmax (awarded 1,000MW) or Ranhill (awarded 300MW), which have not started construction yet (in line with the indication of no compensation cost involved).

Relating to the other 4 new IPPs under review, we believe TENAGA’s 70% owned Jimah East and 51% owned SIPP are unlikely to be materially affected, given TENAGA’s prudent feasibility measures in acquiring these stakes back in 2015-2017 and the current completion rate have already achieved 90% and 30% respectively (as at Mar-2018). YTLP only has one domestic Paka IPP under contract extension, which is not considered as a new IPP.

TENAGA (BUY, TP: RM17.50). We maintain BUY recommendation on Tenaga with unchanged DCFE-derived TP: RM17.50. Tenaga’s earnings and cash flow are expected to be stable with the implementation of the IBR/ICPT mechanisms. The lowered 7.3% of regulated assets under RP2 (2018-2020) will be offset by higher asset base, new contributions from associates and power plants.

YTLP (BUY, TP: RM1.25). We maintain our BUY recommendation on YTLP with higher SOP-derived TP: RM1.25 (from RM1.08) following higher assumed IRR for Attarat power and Tg Jati power. YTLP has strong underlying cash flow from its oversea subsidiaries and investments and we expect a stable dividend payout with attractive dividend yield and limited downside risk. The recent active share buyback exercise and share acquisition by major shareholder YTL Corp and related party shareholders reaffirm our positive outlook on YTLP.

Source: Hong Leong Investment Bank Research - 13 Jul 2018