Utilities sector
Maintain “neutral”. According to recent press reports, some of the new power plants might not begin operations as scheduled due to construction hiccups. The plants in question are Tanjung Bin (1,000mw commissioning in March 2016), Jimah (3B) (2,000mw commissioning in phases between October 2018 and April 2019), and Pasir Gudang (4A) (1,000mw to 1,400mw commissioning in June 2018).

Based on the Energy Commission’s indicative timeline and assuming a 4% peak demand compounded annual growth rate (CAGR) in 2014 to 2020, Peninsular Malaysia’s reserve margin would trend between 14% and 21% from 30% in 2013 by our estimates. A 3% peak demand CAGR in the same period would result in reserve margins trending between 19% and 27%.

Assuming a 12-month delay to Tanjung Bin and Jimah (3B), and a 24-month delay to Pasir Gudang (4A), the reserve margin could trend as low as 10% in 2019. We think a short extension of expiring service-level agreements and power purchase agreements (PPA) appears the most convenient fix to alleviate such a situation.

We caveat this is purely a hypothetical stress-test, since there have not been any official confirmations of delays.

New generation capacity will still be required beyond 2020 in our view. Independent power producers including YTL Power International Bhd (“hold”, target price [TP] of RM1.65), generally benefit more from new capacity relative to Tenaga Nasional Bhd (“buy”, TP of RM14).

However, we note PPA terms have become increasingly onerous in recent years. — Maybank Investment Bank Bhd, Oct 1
 

This article first appeared in The Edge Financial Daily, on October 2, 2014.