The dispute between YTLPOWR and TENAGA over Paka’s PPA Extension and Land Lease Agreement has finally resolved with the signing of new agreements to enable the IPP to start operation from Sep 2017. This is highly positive to YTLPOWR, in term of earnings as well as price catalyst. However, earnings impact is expected to be insignificant. We keep our MARKET PERFORM and price target of RM1.50/share pending its 3Q17 results release later this month.

Paka’s dispute resolved finally. On Tuesday, TENAGA (OP; TP: RM17.17) announced that it has signed a new PPA and Land Lease Agreement (LLA) with YTLPOWR for the latter’s 585MW Paka Power Plant to continue the operation for a further period of three years and 10 months which scheduled to commercial operation from Sep 2017. Under the new LLA, it will govern the lease of the portion of TENAGA’s land in Paka used by YTLPOWR for the purpose of the Extension PPA and demobilisation of the plant thereafter. So far, YTLPOWR has yet to make any announcement to Bursa Malaysia.

A long overdue issue. This is definitely a highly positive news to YTLPOWR as the prolong delayed of PPA Extension, which resulted losses to YTLPOWR in the past four quarters as it continued to incur opex without revenues. It reported RM26m/quarter pre-tax loss in the past two quarters. To recap, the GEN1 PPA had already expired in Sep 2015 and it was initially awarded a PPA Extension from Mar 2016 to Dec 2018. However, TENAGA did not agree with the old LLA to continue with the PPA Extension which we believe is a lopsided agreement that was signed in Jul 1993. Eventually, TENAGA took the dispute to the court at the end of last year.

Small contribution but earnings needed. Although earnings impact is expected to be less-meaningful, c.RM65m per year at pre-tax level which is c.6%-7% of group earnings, the PPA Extension does cushion pressure from the depressed PowerSeraya earnings and persistent losses at YES. With the recovery of MYR and YTLPOWR derived its earnings mainly from offshore, a local earnings contribution like Paka IPP does mitigate the impact. On the other hand, this local IPP could add c.RM0.03/share to YTLPOWR’s RNAV.

Keep MARKET PERFORM for now. As the PPA Extension will take effect only from Sep 2017 which will only impact YTLPOWR’s FY18 (YE Jun) and the valuation will not affect our recommendation rating, we are keeping our MARKET PERFORM call, price target of RM1.50/share and earnings estimates for now pending its 3Q17 results release later this month. Upside risks to our call include a sudden recovery by PowerSeraya and unexpected turnaround of YES.

Source: Kenanga Research - 11 May 2017