Utilities sector
Maintain overweight: In recent years, the shortage of indigenous gas in Kertih, Terengganu, highlights a case for optimal fuel mix and fuel security planning. Today, Peninsular Malaysia is powered by 21,749mw of generation capacity. Tenaga Nasional Bhd (TNB) has a 53% market share of Peninsular Malaysia’s generation capacity while the notable independent power producers (IPPs), that is Malakoff Corp Bhd (51% owned by MMC Corp Bhd), 1Malaysia Development Bhd (1MDB) and YTL Power International Bhd command market shares of 23%, 17% and 5% respectively.
In terms of fuel mix, gas and coal make up 55% and 38% of generation mix respectively. The balance 7% is derived from hydro, distillates and diesel. Going forward, we expect the fuel mix to change as regulators aim to rely less on gas as a primary fuel source. From a recent meeting with the regulators, we gather that the proposed energy mix is 25% to 35% gas, 55% to 60% coal and 6% to 7% hydro by 2024.
In the longer term, we understand that regulators may consider resurrecting the idea of importing electricity from Sarawak (but this time, not solely from the 2,400mw Bakun dam but also from other hydro power plants planned around Sarawak).
Against a backdrop of a 4.5% to 5% organic electricity demand growth (official estimates), Malaysia’s power plant upcycle will resume with the Energy Commission (EC) opening competitive bids for the Track 4 power plant.
Track 4A — which is expected to be called by the second quarter of 2014 — will likely be offered as a brownfield project to be situated at the sites of the existing power plants in either Pasir Gudang or Paka.
All in, we are positive on the next planting upcycle and see emerging opportunities for the first short-term contracts.
As for Track 4A, we expect both the offtaker and IPPs to bid for the tender. Based on a project internal rate of return (IRR) of 8%, Track 4A could yield an equity value of RM560 million. This could lift TNB, YTL Power and MMC’s fair value by 0.7%, 3.3% and 2.6% respectively.
Maintain “overweight” on the sector, underpinned by positive regulatory framework — which should help lift TNB’s near-term earnings. TNB (“buy”, target price [TP]: RM14.70) is a key top pick for Affin. We like the stock as the incentive based regulation mechanism provides good earnings visibility and cash flow prowess.
We would “sell” Petronas Gas Bhd (PGas) as we believe its near-term earnings growth prospects are largely priced in.
We expect sector weighted (by market capitalisation) earnings to grow by 17.4% in calendar year 2014 (CY14) before tapering to 10.1% in CY15 on a high base.
The acceleration in earnings growth for CY14 is driven by: (i) TNB’s base tariff hike; and (ii) MMC’s low CY13 earnings base as a result of the unscheduled Tanjung Bin plant shutdown.
Skewed by PGas’ lofty valuations, the sector trades at 14.3 times CY15 earnings while offering 10.1% earnings growth and compressed 2.5% net yields. — Affin Investment Research, April 3
This article first appeared in The Edge Financial Daily, on April 4, 2014.