Sunday, November 28

Analysts positive on YTL Power‘s inclusion under consortium for power plant project

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KUCHING: YTL Power International Bhd’s (YTL Power) inclusion under a consortium for the development of a new power plant project in Johor has been deemed by analysts as highly positive news.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), while it maintained that a direct negotiation of independent power producer (IPP) contract award is not healthy for the industry this new power plant’s levelised tariff, which must be comparable to the Prai combined cycle gas turbine (CCGT) will limit a lopsided power purchase agreement (PPA) being signed like the previous PPAs, especially the GEN1 IPPs.

The research arm noted that the levelised tariff for the 1,070 megawatt (MW) Prai CCGT was fixed at 34.7 sen per kilowatt hour (kWh).

“This news is definitely highly positive for YTL Power, as it finally managed to bag an IPP after losing the Track 3B’s bid to 1Malaysia Development Bhd (1MDB) in March,” Kenanga Research opined.

This is especially as YTL Power has been on the lookout for new projects to bridge the earnings gap as its Gen1 PPA for Paka and Pasir Gudang Power Plants are expiring in 2015.

“As the project value and equity stake of each consortium member were not disclosed, we are unable to quantify the financial impact to YTL Power for the moment,” Kenanga Research said.

That said, based on its cash position of RM8.68 billion as at March-14, the research arm believes YTL Power should have no problem financing this project.

“The estimated cost of the 1,070MW Prai CCGT, where the PPA was signed in November-12, was RM2.47 billion,” it noted.

Although this new power plant is expected to bridge the earnings gap for its two local power plants under the GEN1 PPA, Kenanga Research pointed out that there will be at least no local power earnings for three years as the new plant will only start commissioning in 2018.

“Furthermore, this new 1,000MW-1,400MW power plant was awarded to a consortium while the combined 1,212MW Paka and Pasir Gudang Power Plants are wholly owned by YTL Power,” it observed.

In addition, the research arm highlighted that the strong Singapore dollar should benefit YTL Power although the electricity market in Singapore remains competitive with new capacity coming into the market.

Meanwhile, it further noted that earnings prospects for YES are set to be better judging from its growing subscriber base  while for Wessex Water Services Limited, earnings are expected to be fairly flattish until it gets the next tariff revision.

Despite making no changes to its financial year 2014-2015 (FY14-FY15) estimates, Kenanga Research upgraded its rating on YTL Power to ‘outperform’ from ‘market perform’.

“We expect this news to be price positive to YTL Power as its share price has been suppressed on the expiring of the two GEN1 IPPs,” it reiterated.

The research arm has however retained its target price of RM1.77 per share, which is a 10 per cent discount to its revalued net asset valuation (RNAV) of RM1.97 per share.