News

Last weekend, the Edge Weekly reported that YTLPOWR is one step closer to recovering up to RM700m from Petronas for overpaying on gas supplies over the course of the two local power plants namely Paka and Pasir Gudang Power Plants.

It was reported that arbitrators in London have reached a decision in favour of YTLPOWR after conducting evidential hearings since March this year.

However, the exact quantum of the settlement, when and how it will be paid was not made clear as the settlement is still being finalised.

Comments

We do not expect this to have a fundamental impact to YTLPOWR but more of a one-off claim for the disputed sum stemming from a disagreement between YTLPOWR and Petronas that dates back to 1997 on the gas price the first IPP has to pay.

The news article reported that YTLPOWR had in 1993 entered into a gas supply agreement with Petronas where the price of the gas to be supplied is calculated based on a market price-related formula at a discounted price. However, this was withdrawn during the 1997 Asian financial crisis as the government adopted a fixed gas price of RM6.40/mmbtu.

In fact, it was already reported in YTLPOWR’s FY14 Annual Report that RM261.1m, up from RM254.6m in FY13, was recognised as amount recoverable from supplier in relation to the arbitration.

Should YTLPOWR win this arbitration, the RM700m claim would add only 8.5 sen/share to its current RNAV of RM1.87/share, assuming cash settlement. Hence, there is only 4.5% increment in RNAV valuation.

We believe the PPA extension of the two power plants is more important since the PPA for Paka Plant will expire this September and early next year for Pasir Gudang Plant. So far, there is no news of the PPA extension for GEN1 IPPs although the concession expiry is fairly soon.

Outlook

Being in the utility concession business, YTLPOWR’s earnings are fairly resilient. However, there are concerns over the Singaporean operations as the electricity market there remains competitive with new capacity coming on-stream, although the strong SGD should benefit YTLPOWR. Meanwhile, earnings prospect for YES is set to improve, 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 FY15-FY17 estimates.

Rating

Maintain MARKET PERFORM

Valuation

Price target maintained at RM1.68/share which is at a 10% holdings company 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 - 29 Jun 2015