Genting Bhd announced that its 95% subsidiary, PT Lestari Banten Energi, has entered into a 25-year power purchase agreement with Indonesia's state-owned electricity company, PT PLN. The project involves the financing, design, construction, commissioning, operation and maintenance of a coal-fired power plant with a gross generating capacity of 660MW in Banten province in West Java. The plant will be developed and operated on a build, own, operate and transfer basis for 25 years.

Maiden greenfield power project in Indonesia. We are marginally negative on the group's proposal to undertake a greenfield power project in Indonesia. Given the fact that this would be the group's maiden foray into Indonesia's power sector, as well as the inherent risks relating to greenfield projects, we believe that the group would have been better off mitigating its risks by embarking on a brownfield project, or a greenfield project with a relatively established partner that has the experience in constructing and managing power plant projects in Indonesia.

Indonesia underinvested in electricity generation capacity. On the flip side, mitigating the overall regulatory risk is the fact that there is severe under-investment in power capacity in Indonesia, with national average hours of blackout per day of 3.8 hours and electrification coverage of 65% remaining well below the government's targeted 90% by 2020. As such, the government is likely to be accommodative to both foreign and private investors in meeting this acute shortfall in electricity generation capacity, which will be amplified by the country's robust economic growth and hence demand for electricity.

Total estimated cost per MW of USD1.5m. The project is expected to cost USD1bn (RM3.19bn), of which 75% will be funded via project debt financing and remaining 25% via equity. This will work out to roughly USD1.5m/MW, well within the ranges for both brownfield and greenfield power projects in Indonesia, as depicted in Figure 1 below.

Funding equity portion no issue. The group can easily tap into its recently raised RM2bn medium-term notes to finance the equity portion of the project, which amounts to RM757m. Given that the project will only be completed by 2017, the group's gearing ratio would only increase on a staggered basis. Assuming full drawdown, its net debt will rise to RM4.1bn from the current RM1.8bn, although its net gearing will remain relatively low at 12.2%. With the debt relating to the power project ring-fenced against the stable PPA cash flows and the group's relatively low gearing, its capacity to raise more debt to drive growth remains intact.  

Source: OSK