Utilities - More events in 4Q12

We maintain an OVERWEIGHT on the Power Sector with TENAGA (OP; TP: RM7.90) as a 4Q12 “Dark Horse” pick because an earlier than expected GE timing will rerate the stock. Its strong visible government support indicates that the current compensation structure given to TENAGA will continue beyond Sep-12, limiting its cash flow downside risks since subsidy rationalisation plans are unlikely until the GE has passed. YTLPOWR’s (MP; TP: RM1.80) share price will continue to be capped as the market adjusts its perception on the stock from a dividend angle to an entrepreneurial one. Its weaker than expected dividend payout despite its rising cash pile seems to indicate its aggressive M&A ambition with opportunistic bargains abound amidst the global economic uncertainties and hence the potential sale of Malaysian IPP assets is unlikely to flow back to shareholders. MMC meanwhile (OP; TP: RM2.80) is a worthwhile bet on positive news flows on possible asset acquisitions and new order book replenishment like the privatisation of Keretapi Tanah Melayu Berhad (KTMB) and the construction of the Gemas-Johor Baharu Electrified Double Track railway project (EDTP). We believe that it is critical for MMC to acquire such strategic assets (KTMB) to replace its reduced exposure in its utility companies like Gas Malaysia and Malakoff after their IPOs. Currently, we are keeping our NEUTRAL recommendation unchanged for the Water sector as we see heightening risks closer to the upcoming GE. Nonetheless, for thematic play, we see Puncak (OP; TP RM3.05) as another “Dark Horse” pick as its value could emerge should Barisan Nasional (BN) wins the Selangor state.

Mixed bag of 2QCY12 results. Tenaga delivered better than expected results as it was able to ramp up more coal productions (now at maximum capacity), which has a lower unit cost vs. MFO/diesel. YTLPOWR’s results were not surprising and did see its YES” pretax losses narrowing likely due to Bestarinet. However, its quarterly dividends disappointed us, with only a FY12 NDPS of 4.7 sen (-50% YoY) despite its strong RM9.6b cash pile, this we reckon could be due to the group conserving its cash for more M&A activities. MMC’s results were widely within expectations and we anticipate stronger quarters ahead due to seasonal factors, especially for its utility and infrastructure division. Puncak’s results came in within our forecast and were well supported by its oil and gas division on top of the steady contribution from its water business. Nonetheless, at this time, its oil  and gas division only accounts for a small fraction of Puncak’s value. We still expect the takeover deal on its concession to be the immediate re-rating catalyst.

An exciting 4Q12. There is a possibility of YTLPOWR disposing of its Malaysian IPP assets to 1MDB as seen with the latter’s acquisition of Tanjong and Genting Sanyen’s assets at strong premiums. Assuming similar premiums to Genting Sanyen (both are base load plants), we estimate a sale price of c. RM3.0b for YTLPOWR’s Malaysian IPP assets, which will increase the group’s cash pile to RM12.6b. However, we do not expect YTLPOWR (MP; TP: RM1.80) to give any special dividends given its M&A ambitions in the short to medium term. Oct-12 will see the award of Track 1 (Prai; up to 1400MW) and Track 2 (extension of 1^st  Gen PPAs by 5-10 years on lowered capacity rates for 1^st  Gen players that qualify). Although we think YTLPOWR is in the lead to win Track 1 as it enjoys cost advantages (refer to YTLPOWR report dated 30/1/12) that would enable it to bid competitively, we do not discount 1MDB’s edge in the form of it helping the nation in consolidating the power sector for a potential ‘power pool’ model (refer overleaf). The outcome of Track 2 will be neutral for Tenaga as the cost savings will be used to neutralise higher fuel costs. 

…but TENAGA may see more ‘delays’, although downside risks are capped, depending on the GE timing. The delays we are referring to its decision on gas pricing and of course, tariff hikes. (Refer overleaf for more details and “meet Tenaga’s CEO/CFO session” key takeaways).  

Source: Kenanga