• The Energy Market Authority (EMA) of Singapore in its latest Singapore Electricity Market Outlook (SEMO) has projected that 1,650MW will be retired from the system in 2021
• EMA projects that with the reduction in capacity, the overall reserve margin would drop to 31% in 2021 from the current 62%, which indicates a less competitive environment moving forward
• Although EMA’s projection is more aggressive than our projections, we have already factored in a higher contribution from YTLP’s Singapore operations. Reiterate HOLD.

Easing competition will help drive profitability

We believe that the overall reduction in capacity is still moving in the right direction, although the retirement of 600MW in 2020 fell short of the previous projection of 720WM. The shortfall is also likely the reason why EMA is projecting a higher cut in capacity of 1,650MW for 2021, which is significantly higher than the 400MW projected previously. Based on EMA’s projections, the reserve margin would be lowered from the current 62% to 31% by end of 2021. Although our projections are higher than EMA’s forecast, as we are more conservative in our demand projections, the lowering of the reserve margin would no doubt help ease the current overcapacity situation.

Tuaspring acquisition is for the long term

Although YTLP proposed to acquire Tuaspring in March 2020, the deal has yet to be completed, pending the approval from PUB. It is challenging to forecast the potential losses from Tuaspring, as the power plant is part of an integrated facility which includes a water desalination plant. The acquisition is only for the 411MW power plant. However, we believe that the losses are likely to be lower than previously anticipated, as YTLP would not be burdened by any liability related to the power plant (LNG contracts). Our view on the acquisition remains unchanged - we believe that the acquisition is a cheaper alternative to replace YTLP’s old capacity and to help speed up the market consolidation process.

Reiterate HOLD with an unchanged TP of RM0.71

Given that the industry players continue to retire capacity, the overcapacity issue should continue to ease moving forward, which would help to drive better profitability for YTLP. However, we believe that the YTLP share price is already fairly valued, hence we are maintaining our HOLD call and TP at RM0.71.

Overcapacity is easing

A key concern by the market is whether a cut in capacity would follow through, as based on previous projections, by 2022/23 the reserve margin could fall significantly and to below the 30% threshold (EMA has revised lower the minimum threshold to 27% in SEMO 2020). We believe that the concern has now eased, given that industry players have cut overall capacity by 12.5% or 1,719MW since 2018 from 13,649MW to the current 11,930WM. Due to the cut in capacity, the reserve ratio is now at 63% compared to 85% in 2018. EMA projects that with the rise in demand and reduction in capacity, they are expecting that the reserve margin will fall to 31% by end 2021.

Source: Affin Hwang Research - 7 Jan 2021