This article first appeared in The Edge Financial Daily, on November 11, 2015.

YTL Power International Bhd
Nov 9 (RM1.53)
Maintain add, earnings per share (EPS) and target price at RM1.70: On Saturday, The Edge weekly reported that Petroliam Nasional Bhd (Petronas) has yet to sign the gas service agreement (GSA) with YTL Power. 

Recall that the power purchase agreement (PPA) of YTL Power’s 808mw power plant in Paka has been renewed for the period of March 1 2016 until Dec 31, 2018. The signing of the GSA is critical to ensure that the plant will be operational when the new PPA term starts.

Certain parties speculate that the delay in the signing is due to the gas price dispute arbitration between Petronas and YTL Power, under which the latter may recover up to RM700 million from the state oil company. 

However, Petronas said that it views the arbitration and the new GSA as two separate matters, implying that the delay in the signing of the agreement is due to other undisclosed factors.

Whatever the reason behind the delay, the government appears to be on YTL Power’s side. 

It was reported that the government has intervened in the hope of resolving the impasse. We believe that the GSA will be signed eventually as YTL Power’s plant is vital to keep the reserve margin high, especially in 2018, given the delay in Project 3B.

Nonetheless, there would be no negative impact on our EPS forecasts, as we assumed that the plant stopped operating once its first-term PPA expired in September 2015. 

The potential earnings from the second-term PPA are not reflected in our forecasts, as the details have yet to be finalised. We believe that the second-term PPA will enhance our financial year 2016 to 2018 (FY16 to FY18) EPS by 1% to 3%, judging from past cases of first-generation PPA renewal.

We continue to like YTL Power for its attractive dividend yield. 

Since almost all of its earnings come from its assets in the United Kingdom and Singapore, investors are effectively getting above 6% dividend yield from utility assets in these advanced economies, where the long-term government bond yields are only 2% to 3%. Potential rerating catalysts include the signing of the GSA and turnaround in its mobile broadband segment and utility business in Singapore. — CIMB Research, Nov 8