TNB  announced  on  Bursa  that  it  has  signed  an  engineering, procurement and construction (EPC) contract with a consortium for the recently  secured  Project  3A  to  develop  a  1,000MW  coal-fired  power plant  in  Manjung,  Perak.  We  deem  this  in  line  with  our  expectations. Maintain BUY, with our FV unchanged at MYR10.43.

- Salient  details.  According  to  its  official  Bursa  release,  the  consortium comprises  of  Sumitomo  Corporation,  Daelim  Industrial  Co  Ltd,  Sumi-Power  Malaysia  SB  and  Daelim  Malaysia  SB.  The  key  components  of equipment for the project, including turbines, boilers and generators, will be supplied by Hitachi – the original equipment manufacturer to the EPC contractor.

- Estimated cost of MYR5-5.5bn. While the quantum of the EPC contract was not disclosed, we estimate that Project 3A, to be known as Manjung Unit 5, will cost MYR5-5.5bn in total. This contract award came in slightly over a month after TNB,  together  with  its  Japanese partner  Marubeni  Corp,  was  announced  the  winner  for  Project  3A.  We  deem  this  in  line with  our  expectations  and  we  believe  that  the  project  is  on  track  to  go operational by 1 Oct 2017.  

- 12,000MW  generation  capacity.  With  this  project  in  the  bag,  we estimate that TNB’s generation capacity will breach the 12,000 megawatt (MW) mark come 2018 from 9,041MW currently. This takes into account its existing expansion projects, which include the 2x535MW site in Prai, Penang, a 265MW hydro plant in Hulu Terengganu and a 372MW hydro plant in Ulu Jelai, Pahang, as well as the ongoing expansion of Manjung Unit 4 – a 1,000MW coal-fired plant in Perak.  

- Maintain BUY. All in, we maintain our BUY call on TNB, which is our top pick  for  the  utility  sector.  Pegged  at  an  unchanged  FY14  P/E  of  13.0x, we  reiterate  our  FV  of  MYR10.43. The counter’s key re-rating  catalysts are continued weakness in coal prices and  the potential implementation of the long-anticipated fuel cost pass-through formula.

- Risks.  The  risks  to  our  recommendation include  a  potential  recovery  in international coal prices and slower-than-expected economic growth. 

Source: RHB