This article first appeared in The Edge Financial Daily on March 16, 2020

YTL Power International Bhd
(March 13, 59.5 sen)
Upgrade to buy with an unchanged target price of 70 sen: YTL Power International Bhd (YTLP) is acquiring Hyflux Ltd’s Tuaspring 396 megawatt (mw) combined cycle gas turbine (CCGT) power plant, which has been placed under receivership, for S$331 million (RM1 billion). The acquisition involves the plant and its associated assets as well as a land lease of the site with a 20-year remaining term.

The purchase will be settled by S$230 million (RM697 million) cash and S$101.5 million (RM308 million) via shares and loan notes amounting to a 7.5% stake in the post-acquisition entity in YTL Utilities Ltd, the holding company of YTP PowerSeraya Pte Ltd.

At RM1 billion consideration, the acquisition values the Tuaspring power plant at just RM2.5 million per mw. This is considerably cheap relative to its estimated replacement cost of RM3 million to RM4 million per mw for a typical CCGT plant.

Given that the assets have been placed under receivership, the Tuaspring plant is no longer tied to any previous take-or-pay liquefied natural gas purchase contracts, which gives YTLP much better flexibility in output management. The plant was commissioned in 2016 at a capital expenditure of more than S$1 billion, inclusive of the water desalination plant, which is not part of YTLP’s purchase.

Singapore’s power sector has been dragged by overcapacity since 2015, but the purchase triggers a much needed consolidation in the sector. Combined with PowerSeraya (3,100mw), YTLP would end up with a 19.6% capacity share from 15.6% currently, overtaking Senoko Energy Supply Pte Ltd as the second largest player (from third) in Singapore’s generation sector.

The cash portion of the purchase consideration of RM690 million represents 9% of YTLP’s gross cash as at end-December 2019, and based on this, is estimated to raise net gearing marginally to 1.7 times from 1.66 times. In financial year 2017, Tuaspring integrated water and power plant registered a net loss of S$82 million, mainly from the power plant given the weak electricity market. Coupled with an expected slowdown in the Singapore economy, we think in the immediate term, the drag for the Singapore power sector will likely remain.

In the middle term, nonetheless, consolidation of the sector should translate into improved pricing power for generation companies. Singapore’s Energy Market Authority is projecting peak demand to grow by a compound annual growth rate of 1.5-2.1% over the next decade (2020-2030) relative to a 7%/4% contraction in supply capacity in 2020/2021 respectively. Reserve margins are projected to reduce from 33% in 2020 to 21% by 2023.

At an estimated replacement cost of RM3.5 million per mw, we estimate Tuaspring could entail a gross value of RM1.39 billion (18 sen per share), or a valuation surplus of five sen per share against the acquisition price. In the near term, however, the market might tag a higher risk premium to the purchase price given the current overcapacity situation.

Meanwhile, YTLP’s share price has retraced significantly by up to 28% in the past 12 months and by 13% in the past one month. — MIDF Research, March 13