With two new power plant awards in the past three months and the two problematic coal-fired IPPs are likely to be back to the system later in 3Q14, the Power Utility is expected to be more news flow in the 2H of the year. Firstly, we remain that any new power plants should go through a competitive bidding exercise which will benefit and fair to all stakeholders, although the direct negotiated Track 4A is unlikely to be a lopsided IPP given the condition set. Even though the Energy Commission had justified the basic of the Track 4A award, we still want to see how the upcoming Track 4B being awarded in the near future. Second, the unplanned outages at Tanjung Bin and Jimah Power Plants had already been rectified and to stabilise in 2H14. We still believe that there is no tariff revision in the June Review, given the current inflationary pressure, but possibly a hike in December Review. TENAGA remains as our TOP PICK for the sector while PESTECH is a proxy play.

1QCY14 results generally inline, except the usual outliner MMCCORP (MP; TP: RM2.77) which was hit again by the continued forced outages at Tanjung Bin Power Plant caused by boiler tube leaks. However, the 1Q14 MMCCORP results were improved sequentially attributable by higher dispatch factors from gas-fired power plants. plants. TENAGA (OP; TP: RM13.58) saw its 2Q14 top-line grew 4% QoQ, on the back of 2-month effect of the 15% tariff hike which took effect in Jan-14, but bottom-line shrunk 4% on higher fuel costs as the two coal-fired plants out of the system. Elsewhere, YTLPOWR (OP; TP: RM1.77)’s 3Q14 results helped by tax credit while PESTECH (OP; TP: RM7.27) had a soft start in 1Q14 on seasonality.

Competitive bid vs. direct negotiation. Concerns of the declining reserve margins which partly caused the blackout in five states in early May had prompted the EC to award the Track 4A in end May-14 via a direct negotiation to a consortium which consists of SIPP (NOT LISTED), YTLPOWR and TENAGA as to fast-track the 1,000MW-1,400MW combined-cycle powergenerating plant and commission by Jun-18, which is two years ahead of schedule. In mid Jun-14, YTLPOWR decided to pull-out from this controversial project. Although the Track 4A is unlikely to be a lopsided IPP given that the levelised tariff of Track 4A must be comparable to the 1070 MW Prai CCGT tender exercise at 34.7sen/kWh which concluded in 2012, we maintain that a direct negotiation of IPP contract award is not healthy for the sector reforms. We still want to see how the upcoming Track 4B being awarded in the near future. On the other hand, three months after being selected as the Preferred Bidder of Project Track 3B, 1MDB-Mitshui finally received the letter of award in early Jun-14 from the EC for the development of 2,000MW ultra super critical coal-fired power with first unit to start commercial operation in Nov-18 and May-19 for the second unit.

The two problematic coal-fired power plants to stabilise in 2H14. The Tanjung Bin and Jimah Power Plants have been facing unplanned outages since mid-2013, which partly hit TENAGA’s bottom-line as well, as the integrated utility has to burn more expensive LNG fuel. Cross check with TENAGA and MMCCORP, these two IPPs are running well currently but the plants are still needed to go on staggered planned outages for ratification works. In view of this, we believe these two problematic coal-fired power plants to back into system by 3Q14 if not later 4Q14. So far, TENAGA had indicated that the issues should be permanently resolved for Jimah by end-2014 and Tanjung Bin by mid-2015. As such, the timeline of problem solving for these two plants is key to the listing progress for both 1MDB and Malakoff.

OVERWEIGHTing the sector with TENAGA remains as TOP PICK. We expect no tariff adjustment in this Jun Review given the inflationary pressure, but a tariff revision in December Review is likely. Even then, we still continue to like TENAGA and keep it as our TOP PICK for its still compelling valuation. On the other hand, we continue to like the small cap PESTCH for its explosive earnings growth story as an alternative power play. Although PESTECH’s share price has risen >60% since our initiation report released in Feb-14, we believe there is still upside given that it has good chance of clinching the energy infrastructure projects for Track 3B, Track 4A and RAPID project which worth c.RM200m-RM300m each. In a separate report release today, we upgrade our price target for PESTECH to RM7.27/share (or ex-bonus TP of RM4.36) from RM5.34/share after we raised our FY15 revenue assumption to RM450m from RM335m.

Source: Kenanga