YTL Power International Bhd
(Jan 13 RM1.89)
Maintain hold at RM1.89 with an unchanged fair value of RM1.86: The Edge weekly reported over the weekend that YTL Power had emerged as the front runner for Project 3B which involves the construction and operation of a 2,000mw coal-fired power plant. The plant, potentially costing RM11 billion, is scheduled to commence operations in stages in October 2018 and April 2019.

Recall that YTL Power had proposed for the project to be built in Tanjung Tohor, Johor together with SIPP Power Sdn Bhd, of which the Sultan of Johor is a major shareholder.

Based on the evaluation report submitted to the board of the Energy Commission (EC) last month, YTL Power is the preferred bidder given that its notional adjusted tariff of 25.2 sen per kWh was the lowest bid. The EC is expected to announce the winner of the bid by Jan 20.

The preferred bidder will then complete negotiations on the power purchase agreement (PPA) with Tenaga Nasional Bhd (TNB).

Earlier, there were reports of technical issues with YTL Power’s foreign controlled boiler contractor.

The second closest bid was 1Malaysia Development Bhd’s (1MDB) proposal at a brownfield site in Jimah, Negeri Sembilan. IMDB is currently in the process of acquiring a 75% stake in the existing 1,400mw coalfired power plant in Jimah.

We understand that the project’s internal rate of return (IRR) over the 25-year concession is likely to be in the high single digit, unlike the over 15% IRR concessions for YTL Power’s PPA for the Paka and Pasir Gudang gas-fired power plants which expire in September 2015.

Assuming that YTL Power has a 60% equity stake in the project, and a project IRR of 9%, debt to equity ratio of 80:20 and cost of funding at 6%, we estimate that Project 3B, if successfully secured by the group, could raise the group’s sum-of-parts by 9% to RM2.02 per share and provide incremental earnings of RM260 million (20% of financial year 2016 ending June 30 [FY16F]).

As earnings will only start to partially commence in FY19F, the group will experience a three-year gap in domestic power earnings in FY16F to FY18F. Hence, we maintain FY14F to FY16F earnings.

The stock currently trades at a fair FY14F price-earnings ratio of 13 times, compared to TNB’s 12 times. But these valuations are not attractive without a clear dividend policy presently. — AmResearch, Jan 13

This article first appeared in The Edge Financial Daily, on January 15, 2014.