This article first appeared in Capital, The Edge Malaysia Weekly on September 30, 2019 - October 6, 2019
THE 10-year master plan to reform the domestic power industry under Malaysia Electricity Supply Industry 2.0 (MESI 2.0) is expected to reduce production costs and lower tariffs in the long run.
Key reform initiatives under the government’s plan include: allowing power generators to source their own fuel to optimise costs; moving from the power purchase agreement (PPA) regime to the capacity and energy market; and establishing a third-party access (TPA) framework and network charges for the grid system. In addition, MESI 2.0 provides for the facilitation of green energy for producers and consumers.
TA Investment Management chief investment officer Choo Swee Kee believes that the liberalisation — and the unravelling of the “cosy” relationship between the country’s largest utility, Tenaga Nasional Bhd (TNB), and the existing independent power producers (IPPs) — is generally good for the power industry but may be negative for the existing players.
“The restructuring of the industry is supposed to improve efficiency and encourage competition for all players [but] in the short term there could be margin compression.
“We believe that this liberalisation is good for new players who want to get into the power industry,” he says, adding that developers of large industrial parks could explore handling the distribution of electricity in their own parks.
“This could be a new source of income for developers of industrial parks. For example, Sime Darby Property Bhd can now consider also handling the power distribution business to the clients of the Malaysia Vision Valley 2.0 project.”
We look at five stocks that could potentially benefit from MESI 2.0 based on the recommendations of analysts.
Tenaga Nasional Bhd
Although MESI 2.0 spells increased competition for the national utility in the generation space in the longer run, the stock still commands a strong “buy” call.
According to Bloomberg data, 15 of 24 analysts covering the stock have a “buy” call with target prices as bullish as RM16.40 — a 19% upside to TNB’s closing price of RM13.72 last Thursday.
“TNB is the major power generator in Peninsular Malaysia with a capacity of 11,000mw, which works out to 45% to 50% of total power generation. Given the gradual implementation of MESI 2.0, we do not anticipate an immediate material earnings impact on TNB,” HLIB Research says in a Sept 17 note.
According to Minister of Energy, Science, Technology, Environment and Climate Change Yeo Bee Yin, the Energy Commission (EC) will offer supplementary agreements to IPPs to enable them to procure their own coal and gas as soon as the first half of 2021. This means that the IPPs could opt to deviate from the current practice of getting their coal supply from TNB and their supply of gas from Petroliam Nasional Bhd, an option analysts say would not have a major impact on the utility’s earnings.
“We gather that TNB gets very minimal commission to cover the running cost of fuel procurement, hence, any loss of fuel contracts could have a minimal impact on its earnings. Besides, the other IPPs might not be able to source cheaper fuel as TNB has the economies of scale for procurement,” CGS-CIMB Research says in a Sept 17 note.
However, the research firm says it was surprised by the government’s move to establish a TPA framework for the grid system, or transmission and distribution (T&D).
“This is a surprise to us, but we believe TNB will still dominate the T&D market in the medium term given that the group still owns [about] RM50 billion [worth of] T&D assets and there is limited opportunity to expand given that the electricity penetration rate in Malaysia was around 100% as at 2017, according to World Bank statistics,” the firm says.
CSG-CIMB Research sees limited earnings impact on TNB after the announcement of MESI 2.0 as it does not see potential competitors in the near term, given TNB’s dominant market presence, solid balance sheet and expertise in managing the grid system.
The firm has an “add” call on TNB with a target price of RM15.30, a 12% upside to its close last Thursday. TNB is trading at 25.67 times its price-earnings ratio, and has a trailing 12-month dividend yield of 3.88%.
Malakoff Corp Bhd
Independent power and water producer Malakoff Corp Bhd also commands a strong “buy” call among 8 out of 11 analysts covering the stock.
RHB Research says in a Sept 25 note that since IPPs can source coal and gas from third parties, the cost savings can be shared between end users and IPPs.
“This should encourage IPPs, including Malakoff, to improve their efficiency,” the firm says, adding that none of Malakoff’s existing PPAs is affected by MESI 2.0 and will remain intact in the next few years, save for one of the four phases of its 40%-owned Kapar power plant.”
The power plant’s PPA has been extended until year end, with losses widening by 1.2 times to RM26.9 million in the first half of 2019.
RHB Research added that Malakoff’s renewable energy venture, a 21-year contract with a 29mwac large-scale photovoltaic power plant in Kota Tinggi, Johor, could fuel growth.
“While the earnings contributions could be small at this juncture, this could be a new potential growth opportunity in line with the government’s target to increase Malaysia’s power generation mix for renewable energy to 20%, from the current 2%, by 2025.
“Meanwhile, Malakoff is also bidding for 100mw of the large-scale solar cycle 3 (LSS3) project, which is expected to be awarded by the end of the year, as the commercial operation date is slated for 2021,” the firm says.
Compared with a year ago, Malakoff’s share price climbed 4% to 85.5 sen last Thursday. RHB has a “buy” call on Malakoff with a target price of 97 sen, a 13% upside to its closing price on Thursday.
The stock trades at 14.4 times earnings, with a trailing 12-month dividend yield of 6.9%.
Cypark Resources Bhd
In its latest quarterly financial report, Cypark Resources says the group is confident its track record in bidding and securing engineering, procurement, construction and commissioning (EPCC) projects under the previous LSS will give it a key advantage in landing a tender bid under the upcoming LSS3, hence adding more generation capacity and renewable energy sales.
TA Investment’s Choo believes the green energy generation company is one of the new players in the power industry that can benefit from MESI 2.0, given its plans to expand further in the renewables space.
“Assuming there is going to be more than one electricity distributor, other than TNB, Cypark will have more opportunity to supply power to new buyers,” he says.
Compared with a year ago, Cypark’s shares had declined 12% to RM1.36 as at last Thursday. In a July 1 note, UOBKayHian says Cypark is expected to benefit from a direct contract win of a new solar power plant award under LSS3, and its higher EPCC order book.
“We also believe Cypark is well positioned to capitalise on the new energy meter (NEM) programme. Both LSS3 and NEM are estimated to generate RM4 billion to the total EPCC contract value,” the firm says.
The firm maintains its “hold” call on Cypark with a target price of RM1.60, an upside of 18% to its close last Thursday. Cypark is trading at 8.9 times earnings with an indicative dividend yield of 2.79%.
Mega First Corp Bhd
Mega First is well known by investors for its prime project, the Don Sahong hydropower project in Laos, and stands to benefit from MESI 2.0’s push in the renewable energy space.
Mega First has clearly laid out its plans to be involved in the renewable energy space. In its latest quarterly financial report, the group says it has submitted a bid for the LSS3 open tender scheme to develop and operate a 100MWac LSS photovoltaic plant.
In an Aug 23 note, Public Invest Research says more earnings upside is on the way for Mega First if its management is successful in its bid for the project. The research firm adds that Mega First is planning to add a fifth turbine to Don Sahong, which is subject to the approval of the Lao government. Should the fifth turbine be added, Public Invest says it may increase its FY2022 earnings forecast for Mega First by 20% to 25%.
The firm has an “outperform” call on Mega First, with a target price of RM5.04, an upside of 21% to its closing price of RM4.15 last Thursday. Compared with a year ago, Mega First’s share price has gained 25%. The stock is trading at a price-earnings ratio of 13 times.
YTL Power International Bhd
YTL Power was the country’s first IPP in 1993, operating under a 21-year PPA, which was completed on Sept 30, 2015. The group was subsequently awarded the project for the supply of power from Paka power station under a short-term capacity bid called by the Malaysian Energy Commission.
The group also owns YTL Power Seraya, a Singapore-based energy company with a total licensed generation capacity of 3,100mw.
In a Sept 18 note on YTL Power, MIDF Research maintains its “buy” call with a target price of 88 sen, a 17% upside to its close of 75 sen last Thursday.
“YTLP could potentially stage a comeback to the domestic power sector riding NEDA+ (the new enhanced dispatch arrangement platform, which allows the re-entry of expired IPPs into the system) as well as an entry into the retail segment. The stock is trading at an undemanding price-earnings ratio of nine times, while dividend yields are solid at 7% to 8%,” the firm says.
HLIB Research says given that YTL Power’s exposure in the local power sector is only through its Paka PPA, which expires in June 2021, the firm does not see much impact from MESI 2.0. “However, we do not discount that YTLP may be encouraged to participate in the future PPA structure, as it has the advantage to leverage its experience in Singapore Seraya Power.”
Compared with a year ago, YTL Power shares have lost 25% of their value. The stock is trading at 12.4 times earnings, with an indicative dividend yield of 6.7%.
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