KUCHING: Analysts believe YTL Power International Bhd’s (YTL Power) reported shortlisting to bid for Singapore’s fifth water desalination plant offer attractive returns to the company, being a lower risk venture.
MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) in a report, pointed out that Hyflux’s Tuaspring plant — a commercial operation started in 2013 under a similar DB00 contract – has a project value of S$890 million, which translates into circa S$2,794 per cubic metre in capital expenditure (capex).
“Assuming similar cost for the winning bid, the fifth plant (which has a smaller capacity) might fetch a contract value of around S$383 million (RM1.2 billion),” it added.
It also pointed out that 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,” it said.
It noted, desalinated water is Singapore’s fourth water source besides water from local catchments, imported water from Johor and NEWater (high-grade reclaimed water).
It added, other water desalination plants already in operation are the SingSpring plant (130,000 cubic metre per day) and the Tuaspring plant (318,500 cubic metre per day) while a third plant in Tuas is to be completed this year while the fourth plant in Marina East is expected to be ready by 2020.
“The two operational plants meets up to 25 per cent of Singapore’s current water demand and PUB expects desalinated water to account for 30 per cent by 2060,” MIDF Research said.
The research team also pointed out that 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 per cent to group earnings,” it added.
Pending the outcome of the bids, MIDF Research maintained its ‘neutral’ call on YTL Power. It noted that while near-term earnings outlook for YTL Power appears challenging, the stock’s dividend yields remain attractive at six to seven per cent.