News

Last weekend, the Edge Weekly reported that YTLPOWR’s 808MW Paka Power Plant and 1MDB’s 434MW Peaking Plant in Teluk Gong could be awarded a Power Purchase Agreement (PPA) extension in the EC’s recent bidding exercise that will help ease the anticipated power supply shortage in 2018.

It was reported that other bidders for the extension include MALAKOF (NOT RATED) and TENAGA (MP; TP: RM14.32) which also submitted peaking plants.

Comments

This is definitely good news to YTLPOWR as it has not been able to secure any new local IPPs contracts ever since it secured this first IPP in the country more than 20 years ago. In addition, if the news becomes official, the PPA extension for Paka Plant will come in just in time before the 21-year PPA expires in September. The PPA for 404MW Pasir Gadang Plant will expire early next year.

Based on a load factor of 20% for peaking plant, this 808MW plant, which currently is a base-load plant, could contribute RM60m a year at PBT level as opposed to the currently combined two power plants of RM250m. This could lift FY16 earnings by 4.4% and add RM0.07/RNAV share to the valuation.

The lower earnings contribution, which is highly expected, is not a concern given that the power plant is running at no cost, which had already been fully amortised. Any new contract is a bonus so long as the new contract can cover the operating cost.

Although the earnings and valuation accretion is not significant, this piece of news is likely to be a price booster as its share price has been suppressed by the issue of non-renewal of PPA for sometimes.

Outlook

The extension of PPA will keep its local IPP’s earnings running for another 10 years. However, concern could likely be the Singapore operations as the electricity market there remains competitive with new capacity coming onstream, although the strong SGD should benefit YTLPOWR. Meanwhile, earnings prospect for YES is 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

Until an official announcement, no changes to our FY15-FY17 estimates.

Rating

Maintain MARKET PERFORM

Valuation

Price target maintained at RM1.68/share which is at a 10% discount to its RNAV of RM1.87/share.

Risks to Our Call

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

Source: Kenanga Research - 25 May 2015