GE13 is over and now is the time for the industry to see some solutions to its longawaited woes i.e. the electricity tariff review and the Selangor water restructuring. With the Melaka RGT being operational in Jun, where the gas supply will be marked to the market price, an electricity tariff review is likely needed to address the rising fuel cost. As such, a new pricing formula with a fuel cost pass-through mechanism is expected to take place, lessening the burden of Petronas and the government. Although the effect will be earnings-neutral to TENAGA, it also means TENAGA will face less fuel cost risks. On the other hand, both  the Federal Government and the State Government of Selangor have agreed to solve the water restructuring issue in the state soonest by Sep-13, which should bode well for PUNCAK. In summary, we are maintaining our OVERWEIGHT rating on the Power sector, and NEUTRAL rating on the Water sector but with a positive bias. TENAGA is our TOP PICK for the sector.  

A slight disappointment in 1QCY13 results. In the recently just-concluded reporting season, YTL Power International Bhd’s (“YTLPOWR”, MP; TP: RM1.58) 3Q13 results and MMC Corp Bhd’s (“MMCCORP”, MP; TP: RM2.67) 1Q13 results came in below both ours as well as the market expectations as the former was hit by higher depreciation charges for its local IPP while the latter recorded lower power earnings for Malakoff as the Tanjung Bin Power Plant was under major maintenance.  Tenaga Nasional Bhd’s (“TENAGA”, OP; TP: RM8.56) 2Q13 results were above our estimate but in line with the consensus. The main variant between our estimate and the actual results here was the lower  than expected average coal price of USD84.6/MT as compared to our assumption of USD97/MT. Meanwhile, Puncak Niaga Holdings Bhd’s (“PUNCAK”, OP; TP: RM3.50) 1Q13 results were fairly in line.

POWER: Listing of Malakoff delayed.  While there were no major news from TENAGA in 2QCY13, MMCCORP announced in May that the listing of its IPP subsidiary, Malakoff had been postponed to 1HCY14 from 2QCY13 due to its power plants being under maintenance works, which will impact its valuation negatively. On the other hand, YTLPOWR started its share buyback exercise since Mar this year and the company has bought back 179.1m shares in these four months. In fact, the share purchase was the first since Oct-08, when it last bought its own shares. The resumption of the shares buy-back programme may indicate that some corporate exercises could be on the cards. Its chieftain Tan Sri Dato’ Francis Yeoh has openly revealed his quest to take YTL companies private and we believe YTLPOWR could be the next main target.

WATER: Commitment from Federal is a sign of an end to the deadlock. While there were no further developments subsequent to the fifth takeover (i.e. the RM9.65b attempt by the Selangor state government (SSG) to consolidate all the state’s water assets), SSG had sent a letter to the PM to resolve the problem and interestingly, it had also received a reply from the PM that he was open and prepared to discuss with SSG on how to resolve the water consolidation issues and complete them by as soon as Sep this year. This could be positive to the water sector since these two important parties are now committed to end the deadlock. Nonetheless, until the outcome of the potential discussions is known, we remain NEUTRAL on the water sector.  

O&G division to drive PUNCAK forward.  We are maintaining our OUTPERFORM call on PUNCAK with a revised price target of RM3.50 from RM2.85 previously after we raised the targeted earnings multiple for its O&G division to 10x from 4x previously. At 10x PER CY14, this is still at a 10% discount to the small O&G players due to its status as a new player in the industry. We are now appreciating more its O&G division prospect judging from its high likelihood to win jobs. PUNCAK has recently tied up with one of the biggest dockyards, Yiu Lian to prepare for EPCIC job. We also believe that it is positioned well to clinch another transportation and installation project in 2H13. So far, it had clinched RM187m worth of jobs this year.

TENAGA remains the TOP PICK.  We continue to prefer Power over Water Utilities given its expected structural change post GE13, which will benefit all parties. However, we remain NEUTRAL with a positive bias on the water asset restructuring prospect in Selangor. We have OUTPERFORM calls TENAGA and PUNCAK with MARKET PERFORM calls on MMCCORP and YTLPOWR.

Source: Kenanga