• Project value might come up to ~SGD380m based on past projects winners

• Estimated equity IRR in the low teens attractive relative to Singapore power business which is hit by oversupply

• 25-year concession and offtake by PUB lowers earnings risks

• Maintain NEUTRAL at unchanged SOP-derived TP of RM1.40/share

One of four shortlisted bidders. YTL Power is reported to be shortlisted to bid for Singapore’s 5th water desalination plant. The new plant is expected to be located at Jurong Island under a Design, Build, Own, Operate (DBOO) contract with a capacity of 137k m3/day, to be completed by 2020. Singapore’s Public Utilities Board (PUB) will be the offtaker under a 25-year concession. Other shortlisted applicants include Keppel Infrastructure, Sembcorp Utilities and Tuas Power. YTL Power via Power Seraya is one of the larger players in Singapore power generation with plants located at Jurong Island. Power Seraya is also involved in providing other services such as steam supply, natural gas supply, fuel oil storage tank leasing and water production via reverse osmosis desalination for its own use and for sale to industrial and commercial customers. The division however has seen earnings shrink given oversupply in the power generation market. Power Seraya now contributes circa 19% to group earnings. Desalinated water is Singapore’s 4th water source besides water from local catchments, imported water from Johor and NEWater (high-grade reclaimed water). Other water desalination plants already in operation are the SingSpring plant (130,000 cu m/day) and the Tuaspring plant (318,500 cu m/day) (built and operated by Hyflux). A third plant in Tuas is to be completed this year while the 4th plant in Marina East is expected to be ready by 2020. The 2 operational plants meets up to 25% of Singapore’s current water demand and PUB expects desalinated water to account for 30% by 2060.

Attractive returns, lower risk venture. Hyflux’s Tuaspring plant (commercial operation started in 2013 under a similar DB00 contract) has a project value of SGD890m, which translates into circa SGD2,794/cu m in capex. Assuming similar cost for the winning bid, the 5th plant (which has a smaller capacity) might fetch a contract value of around SGD383m (RM1.2b). Hyflux’s Tuaspring plant was estimated to generate an equity IRR in the low teens over a similar concession period of 25 years; considerably attractive relative to Power Seraya’s existing power generation business which is hit by oversupply. A concession and offtake by PUB lowers the project’s risk profile and should be positive for Power Seraya, if successful.

Recommendation. Pending the outcome of the bids, we maintain our NEUTRAL call on YTLP at unchanged SOP-derived TP of RM1.40/share. Near-term earnings outlook is tough, but dividend yields are attractive at 6%-7% (FY17F-18F).

Source: MIDF Research - 8 Feb 2017