News

Yesterday, YTLPOWR confirmed that its GEN1 IPP, Paka Power Plant has been awarded PPA extension by Energy Commission (EC) for a period of two years ten months commencing 1 Mar 2016 to 31 Dec 2018. This follows the expiration of the 21-year PPA on 30 Sep 2015.

Separately, YTLPOWR has registered its interest to participate in the New Enhanced Dispatch Arrangement (NEDA) under rules recently announced by the EC.

Comments

This is not unexpected given that YLTPOWR had already mentioned in its latest 4Q15 quarterly results announced in end-Aug, that the 808MW Paka Power Plant has already been awarded a short-term PPA extension with terms and conditions still being discussed back then.

Based on MALAKOF (OP; TP: RM2.21)’s GEN1 SEV PPA extension in 2013 where capacity payment was reduced almost by half, YTLPOWR should be able to derive RM36m PBT per year from revenue of RM387m based on 73% capacity utilisation as base-load plant. This should add RM0.03/share to its RNAV valuation.

We are positive on the PPA extension as it is win-win for both the IPP and energy off-taker. While the lower earnings contribution, which is highly expected as tariff rate is lower than the previous agreement, the power assets had already been fully amortised thus operating cost is much lower and any extra revenue generated is a “bonus”. TENAGA (MP; TP: RM12.87) is benefiting as well as it is able to purchase the energy at a lower rate.

We are also pleased with the NEDA as part of the sector reforms as the purpose of this new rule is to get the most economical power producers to be suppliers to the energy grid to bring costs down, thus benefiting the consumers. With this NEDA system, it will avoid lopsided PPA being signed as TENAGA had to bear the cost before the ICPT was being introduced in 2014.

Outlook

With the PPA extension which is typically less lucrative while YES is still loss making, YTLPOWR’s earnings are largely offshore driven. Thus, the sharp MYR depreciation of late works in its favour. Our sensitivity study shows a 5% fall in MYR against GBP/SGD/USD results in a 4.4% rise in FY16 earnings.

Forecast

We upgrade our FY16/FY17 earnings estimates by 0.9%/2.6% following the PPA Extension for Paka Powr Plant. A smaller upgrade is applied for FY16 as the PPA Extension has only four months impact in FY16.

Rating

Maintain OUTPERFORM

Valuation

Our new RNAV is now at RM1.95/share after adding back this Paka Power Plant into the valuation. With unchanged 10% holdings company discount to its RNAV, the new price target is now RM1.76/share from RM1.73/share previously.

Risks to Our Call

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

Source: Kenanga Research - 9 Oct 2015