Malaysia power demand growth is expected to remain stable at +2.0-2.5%, based on 0.5x of expected +4.6% GDP growth in 2019. The IBR/ICPT mechanisms remain intact, protecting the sector from the fluctuation of fuel prices over the longer term. The new government’s aspiration of more REs is neutral to Transmission and Distribution (TNB) under IBR/ICPT mechanisms, but negative to IPP players given the potentially lower capacity replacement for their expiring PPAs. We maintain Overweight on Power sector, with BUY recommendation for TNB (TP: RM16.40) and YTLP (TP: RM1.25), on the companies’ stable earnings and sustainable dividend payouts.

Sustainable power demand. For 9M18, Malaysia power demand (Peninsular) registered a growth of +2.7% (driven by Industrial and Domestic segments), in line with our +2.5% expectation for 2018. We expect the power demand growth to sustain at +2.0-2.5% in 2019, based on 0.5x of GDP forecast of +4.6% for the year.

IBR/ICPT. Implementation of IBR/ICPT remains intact for period 2018-2020. Under the new MESTECC, Minister YB Yeo Been Yin approved for a second time hike of up to 2.55sen/kWh in average tariff (on top of base tariff 39.45sen/kWh) to 42.00sen/kW h for 1H19, from current level 40.80sen/kWh in 2H18. Exceptionally to the Domestic segment, the government will continue to subsidize the segment through KWIE (Kumpulan Wang Industri Electric) and maintain the average tariff for the segment at 39.45sen/kWh during the period.

More REs. The new MESTECC is a strong proponent of Renewable Energy (RE), targeting 20% of the country power generation from RE (inclusive of large scale hydropower generation) by 2025. Given the limited potential of new large scale hydropower plants in Peninsular, we expect MESTECC to push for more solar power projects in coming years, to partially replace the outgoing power plants and to fulfil the growing power demand. The government has recently announced the award of 550MW LSS (Large Scale Solar) for Peninsular and Sabah (part of its existing target 2,200MW LSS for 2017-2020 for Peninsular and Sabah) and Net Energy Metering (for private Solar PV projects), while TNB also initiated SARE (Supply Agreement for RE) for solar energy products. Large IPP players would be negatively affected by the government’s aspiration towards RE, as they face the risk of lower capacity replacement (each LSS capacity is only up to 30MW) for their expiring PPAs.

Maintain OVERWEIGHT. We maintain Overweight on the Power sector, given the earnings and dividend sustainability of the sector in time of increasing market uncertainty in 2019. Maintain BUY on TNB (TP: RM16.40) and YTLP (TP: RM1.25).

TNB. We maintain BUY recommendation on Tenaga with unchanged DCFE-derived TP: RM16.40. Tenaga’s earnings remain shielded under IBR/ICPT mechanisms. The recent disappointing 3Q18 result was affected by the RM420m fuel cost under recovered during the quarter, which would be recovered in the following 4Q18.

YTLP. We maintain our BUY recommendation on YTLP with unchanged TP: RM1.25 (based on 15% discount to SOP of RM1.47). YTLP is currently trading at attractive 0.5x P/B while its high dividend payout is sustainable from the stable Wessex Water and Paka Power, offsetting the uncertainty in Seraya Power prior to potential recovery when Seraya Power ending the take-or-pay contract for LNG supply by CY2020. Furthermore, the commencement of Jordan Attarat Power and Indonesia Jawa Power by 2020 would provide further earnings upside to the group.

Source: Hong Leong Investment Bank Research - 14 Jan 2019