News  It was reported that the Energy Commission (EC) had on last Saturday picked the consortium which consists of SIPP Energy Sdn Bhd (SIPP), YTLPOWR and TENAGA (OP; TP: RM13.58) for a power plant project in Pasir Gudang, Johor. The consortium will develop a fast track combined cycle power plant (CCGT) using proven technology with a capacity of 1,000MW to 1,400MW.

 The consortium members were picked based on their ability to offer competitive rates in the recently concluded tender exercise. This was on condition the technical and commercial proposals were acceptable to the EC. The EC stated that the levelised tariff to be considered competitive must be comparable to the Prai CCGT tender exercise concluded in 2012.

 Comments  While we maintain that a direct negotiation of IPP contract award is not healthy for the industry, this new power plant’s levelised tariff, which must be comparable to the Prai CCGT will limit a lopsided PPA being signed like the previous PPAs especially the GEN1 IPPs. The levelised tariff for the 1,070MW Prai CCGT was fixed at 34.7sen/kWh.

 This news is definitely highly positive for YTLPOWR, as it finally managed to bag an IPP after losing the Track 3B’s bid to 1MDB in March. YLTPOWR has been on the lookout for new projects to bridge the earnings gap as its Gen1 PPA for Paka and Pasir Gudang Power Plants are expiring in 2015.

 As the project value and equity stake of each consortium member were not disclosed, we are unable to quantify the financial impact to YTLPOWR for the moment. Based on its cash position of RM8.68b as at Mar-14, YTLPOWR should have no problem financing this project. The estimated cost of the 1,070MW Prai CCGT, where the PPA was signed in Nov-12, was RM2.47b.

 Outlook  Although this new power plant is expected to bridge the earnings gap for its two local power plants under the GEN1 PPA, there will be at least no local power earnings for three years as the new plant will only start commissioning in 2018. Furthermore, this new 1,000MW-1,400MW power plant was awarded to a consortium while the combined 1,212MW Paka and Pasir Gudang Power Plants are wholly owned by YTLPOWR.

 The strong SGD should benefit YTLPOWR although the electricity market in Singapore remains competitive with new capacity coming into the market. Meanwhile, earnings prospects for YES are set to be better judging from its growing subscriber base. For Wessex Water, earnings are expected to be fairly flattish until it gets the next tariff revision.

 Forecast  No changes to our FY14-FY15 estimates.

 Rating Upgrade to OUTPERFORM from MARKET PERFORM. We expect this news to be price positive to YTLPOWR as its share price has been suppressed on the expiring of the two GEN1 IPPs.

Valuation  Retain our price target of RM1.77/share which is a 10% discount to its RNAV of RM1.97/share.

Risks to our Call  Lower dividend payouts, widening YES’ losses and the rise in global economic risks, especially in Europe. 

Source: Kenanga