Stiff competition for two new coal-fired power plants

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Power sector Maintain positive: In December 2012, the Energy Commission of Malaysia (EC) called for tenders for two new coal-fired power plants, one with a capacity of 1,000mw (Track Project-3A) and the other, 2,000mw (Track Project-3B). On March 13, the EC announced the shortlisted bidders on its website.The competition for TP3A, between Tenaga Nasional Bhd (TNB) and 1Malaysia Development Bhd (1MDB), is stiff in our opinion. 1MDB has been shortlisted although the power generation mix of its current plants is only gas.1MDB  has limited experience in running coal-fired plants but it has strategic intent to be a major force in the power industry and plans to list its power assets, probably this year.  Its expansion plans include a potential offer for the coal-fired Jimah power plant. If Jimah and TP3A go into its stable, 1MDB’s capacity will increase from 2,256mw to 3,656mw, which is 32% and 17% of TNB and Malaysia’s generation capacity respectively. TNB has proposed to build the plant in Manjung, Perak, while 1MDB-Mitsui have proposed to build it on the same site as the Jimah power plant, near Sepang in Selangor, as there is excess land there to accommodate up to 2,000mw in additional capacity.Among the shortlisted bidders for TP3B, two already have existing operating coal-fired power plants in Malaysia, namely TNB (2,100mw Manjung power station) and Malakoff Corp Bhd (2,100mw Tanjung Bin power station). Neither 1MDB nor YTL Power International Bhd has coal-fired plants. Under our stock coverage, we have a “buy” recommendation on TNB with a target price of RM8.20 based on discounted cash flow valuation (weighted average cost of capital: 8%). Meanwhile, we reiterate “neutral”  on YTL Power with unchanged target price of RM1.68 based on sum-of-parts valuations given its shrinking dividend and uncertainty whether it will be privatised. — MIDF Research, March 14This article first appeared in The Edge Financial Daily, on March 15, 2013.