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This article first appeared in The Edge Financial Daily on January 7, 2020

YTL Power International Bhd
(Jan 6, 83.5 sen)
Reiterate buy with an unchanged target price (TP) of 95 sen:
It was reported that YTL Power International Bhd (YTLP) subsidiary, PowerSeraya Pte Ltd, is weighing an option to either build or acquire new capacity from other operators, as some of its uncompetitive capacity is near the end of its useful life. While the power sector in Singapore is already heading towards a recovery from an overcapacity problem, market consolidation from within could expedite the recovery. We are currently expecting PowerSeraya to return to profitability by financial year 2021.

As per our last report on Dec 26 last year, we highlighted that overall power capacity in Singapore will be cut by 23% or 1,100MW before the end of 2021, as some power producers will be retiring some of their power-producing capacity. The reduction in capacity will help ease an overcapacity problem, as the overall reserve margin will be lowered from the current 73% to 21%-23%, allowing power producers to increase their selling prices and generate reasonable returns. However, the whole process could take at least another two years as 750MW or 6% has been retired from the system since October 2019.

Due to PowerSeraya’s dominant market position (second), with a 22.8% market share (based on name-plate capacity), it is unlikely to be allowed by the Energy Market Authority to expand beyond its licensed capacity of 3,100MW. However, we believe there is a high likelihood that the acquisition could be approved, if the latter is proposed to replace the existing capacity rather than to increase its allowable name-plate capacity. PowerSeraya should replace its 1,448MW (47% of its capacity) of steam turbine generation capacity: its fuel source is mainly heavy fuel oil and it operates mainly as a peaking plant, due to its high energy costs relative to natural gas and liquefied natural gas.

We believe the power sector in Singapore is already heading towards a recovery in 2021, and the market consolidation could potentially speed up the recovery process. We reiterate our “buy” call on YTLP, with an unchanged sum of the parts-based TP of 95 sen, as we believe the stock valuation is undemanding, trading at a sharp discount to its five-year average price-to-book value of 0.8 times. Key downside risks to our positive call are a weaker-than-expected performance of its other non-core operations/investments and YTL Communications Sdn Bhd’s Yes 4G service. — Affin Hwang Capital, Jan 6

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