The  Association  of  Water  and  Energy  Research  Malaysia  (AWER)  urges the government to make the developers of both the Tanjung Bin and Jimah East  power  plants  pay  for  all  additional  costs  –  fuel  cost  and  capacity charges  –  that will be incurred due to the delays in the construction of the plants. Presently, the government has imposed a penalty cap of RM108m for every 1000MW for the delay in the construction of the plants and AWER fears that any additional cost due to the delay will be translated into a tariff hike that will directly impact consumers. (Source: Financial Daily)

Comments: We are neutral on this development, given the existence of the penalty cap and our view that asking MMC’s subsidiary, Malakoff to bear for all  additional  costs  is  too  big  a  financial  burden.  Recall  that  Malakoff  had recently  notified  the  Energy  Commission  (EC)  that  the  second  phase expansion of its 1,000MW coal-fired power plant in Tanjung Bin, Johor will be  delayed by  6 to  12  months  because  piling  for  the  plant's  main turbine building had given way.The initial expected commercial operation date was March 2016.

We  have  yet  to  factor  in  the  impact  of  the  penalty.  On  a  proforma  basis, assuming Malakoff has to pay the full penalty of RM108m, this could erode MMC’s 2017E earnings by c.20% and reduce our RNAV of MMC to RM3.17 (from  RM3.20).  At  this  juncture,  we  maintain  BUY  on  MMC  with  an unchanged PT of RM3.20.

Source: Affin Hwang Capital Research - 4 Dec 2014