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Power | PDF
Opportunities despite shocks in the system
OVERWEIGHT - Maintained

Power | Author(s): Mohd Faisal SYED AHMAD +60 (3) 2261 9093,


▊ The Edge Weekly’s report on the blackouts in five states due to the unscheduled outages in the coal power plants, Jimah and Tanjung Bin (owned by 1MDB and Malakoff, respectively), calls into question the viability of Malaysia’s national grid reserve margin of 31%. The outages raised Tenaga’s costs as more LNG was used. These appear to be negative developments for the sector but we disagree as: 1) there could be more plant-ups due to the need for greater generation capacity in the near term, and 2) the higher costs due to the power plant outages may be a key test for the FCPT. These are potential catalysts for the sector (Overweight) and Tenaga remains our top pick.



What Happened

The Edge Weekly published an article on the recent blackouts in five states due to unscheduled outages by two coal power plants. The article implies that there is a correlation between the recent blackouts and the speculation that the government has awarded the Track 4A gas-fired power plant via direct negotiations, instead of an open tender. In a separate The Edge article published last week, the Prime Minister indicated that the next electricity tariff hike is imminent. The article focused on the impact of the outages on Tenaga (higher cost due to more LNG required) and the burden on consumers.




What We Think

More plant-ups. Given the rising risk of outages, we think that there will be more plant-up tenders by the Energy Commission (EC). This will provide more opportunities for IPPs such as YTL Power. Fuel Cost Pass Through (FCPT) is likely. The Prime Minister's statement gives us confidence that the electricity tariff hike will be implemented so that Tenaga will be able to pass on the higher cost of burning more expensive fuels to consumers.




What You Should Do

We remain Overweight on the sector as we view these issues as opportunities for the players such as Tenaga and YTL Power. Tenaga remains our top pick.

YTL Power International | PDF
The Fantastic Four(A)
YTLP MK / YTLP.KL | ADD - Maintained | RM1.58 - TP: RM2.55
Mkt.Cap: US$3,327.00m | Avg.Daily Vol: US$1.52m | Free Float: 39.90%
IPP | Author(s): Mohd Faisal SYED AHMAD +60 (3) 2261 9093,

▊ Industry sources indicate that Track 4A has been awarded last week through direct negotiations. We think that it could actually be YTL Power that won the project due to its technical experience with gas fired power plants. However, assuming Track 4A is awarded to another party, Track 4B could be next on the cards. If that doesn't pan out for YTL Power, we then believe that the next move could be privatisation by its parent company. Either way, we expect interest on the stock to increase in the near-term. We maintain our Add call on the stock with an unchanged target price of RM2.55.




What Happened

The Edge Financial Daily reported that the government has awarded the gas fired power plant under Track 4A through direct negotiations instead of an open tender last week, citing industry sources. The article highlighted that the government is accelerating the nation's planting up to avoid power disruptions, thus the direct negotiations for the award of Track 4A. It remains unclear to whom the project was awarded to, although the size of the project is touted to be c.1,400MW. Assuming it is true, this will be the second power plant that is awarded under direct negotiation, with the first being the recently awarded 50MW solar plant to 1MDB.




What We Think

We believe YTL Power is the likely winner for Track 4A. Our belief stems from the fact that YTL Power remains one of the most capable to build and operate the gas fired power plant given its previous experience. Furthermore, YTL Power's Power Seraya in Singapore also gives it an advantage as it has experience in an LNG and non-subsidised fuel market, which the Malaysian power and utilities sector are gradually shifting to. Given both factors, combined with the government's acceleration plans, we strongly believe that YTL Power was the one that was awarded the Track 4A.




What You Should Do

We maintain our Add call on YTL Power with the catalyst being it winning Track 4A, assuming the rumours of a directly negotiated agreement is true. If YTL Power does lose out on Track 4A, we believe there is still Track 4B, which could be another 1,000MW gas fired power plant that would be up for tender. Assuming that doesn't come through as well, we believe privatisation by its parent company, YTL Corp, could be on the cards.

congrats

hng33

why want to reduce liquidity ???