News  YTLPOWR announced yesterday that it has decided not to participate in the Track 4A. Recall that Track 4A was a direct award to the consortium that consists of SIPP Energy Sdn Bhd, YTLPOWR and TENAGA (OP; TP: RM13.58) in end-May.

 The company said it welcomes any opportunity to participate in the Track 4A Project or other new capacity requirements on a competitive basis and is prepared to do it on an accelerated timeline.

Comments  This news does not come as a surprise as the local press had widely reported yesterday that YTLPOWR may withdraw from the controversial Track 4A as the direct award to SIPP-YTLPOWR-TENAGA Consortium had drawn criticism from the public as a direct negotiation award is a setback to the sector reform.

 To recap, we had commented in our Kenanga Today yesterday that the pull-out from the Track 4A may not be bad for YTLPOWR as it had demonstrated its ability to offer competitive rates in the tender exercise of Track 3B. Even if the EC goes ahead with Track 4A without YTLPOWR, the GEN1 IPP still stands a good chance in the upcoming tender exercise of Track 4B later of the year.

 The share price of YTLPOWR has contracted by some 20% since the 52-week high of RM1.86 in Dec-13. We believe that the share price may have bottomed as the downside is limited from its recent historical low of RM1.34 in Mar-13. In worst case, if YTLPOWR is unable to secure any local IPPs at all to replace the expiring soon Paka and Pasir Gudang Power Plants, YTLPOWR’s RNAV is still worth RM1.85/share from RM1.97/share after removing the NPV of these two IPPs which worth RM0.12/share now. As such, with its quality offshore concession assets, the market is valuing the stock at 20% discount to its RNAV which is fairly attractive, in our view.

Outlook  The strong SGD should benefit YTLPOWR although the electricity market in Singapore remains competitive with new capacity coming into the market. While the GEN1 PPAs are expected to expire soon next year, YTLPOWR need to find new IPPs to bridge the earnings gap. 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 Maintain OUTPERFORM

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