Overall, the outcome of Track 1 & 2 supports our view
that the government is pushing forward power sector reforms to reduce subsidy
burdens on both Tenaga and the government’s end. The winners (or absence of
certain players) also lend strength to our argument that the government aims to
consolidate the sector via a few players (namely, Tenaga, Malakoff and 1MDB), as
highlighted in our last sector report (refer to Utilities Sector Report,
2/10/12). We do not deny there may be near term weaknesses because it was
reported that the National Economic Council would not review tariffs this
Dec-12, meaning the next window will be in Jun-13. However, we are still
comforted by the government’s show of support and commitment to the
sustainability of the power sector; it is a matter of time until some form of a
consistent fuel-cost-pass-through tariff system is implemented and we reckon
timing hinges on GE. Maintain OVERWEIGHT on the Power Sector with TENAGA (OP;
TP: RM7.90) as a 4Q12 “Dark Horse” pick. We like
Tenaga because it will be the beneficiary of sector reforms
(rather than the one-off tariff hike!) which will help re-rate its valuations.
View on YTLPOWR remains unchanged (MP;
TP: RM1.80).
Track 1 & 2
results were announced; 1) Tenaga has won the bid for Prai (1071MW) gas plant;
2) only three 1st Gen PPAs get Track 2 PPA extension at new levelized rates,
namely 1MDB’s Genting Sanyen, Segari (MMC’s Malakoff) and Tenaga’s Pasir Gudang
plant.
Tenaga gets Track 1.
For Track 1, it is unsurprising that Tenaga is a winner given that they are the
ultimate cost off-taker and will bid at extremely ‘competitive rates’. We
expect Tenaga to fully finance Prai with bonds given extremely low bond yields;
there should be no material impact
to FY12-13E earnings
as project finance cost will be capitalized whilst
earnings contributions will only commence in 2016.
Only three 1st Gen
PPAs gets Track 2, equivalent to 35% of 1st Gen PPAs out of total 1st Gen
capacity of 6.4GW (comprising of 65% IPPs, 35% TNB). Track 2 results translate
to lower capacity payments for Tenaga. Recall, in order to qualify for Track 2
extension, the IPPs must lower their current rates. However, details are still
sketchy and we could only work out a hypothetical cost saving of RM120m p.a. to
Tenaga. Whatever it is, it was made clear that any potential savings from
lowered capacity payments will be used to negate higher gas prices to Tenaga or
slightly mute impact
of electricity tariff
hikes i.e. NEUTRAL
impact to Tenaga. Another notable is that Track 2
winners are all CCGT plants (higher efficiency rate, which allows for more
competitive bids vs. open cycle plants).
Government appears to
be pushing through PEMANDU’s subsidy rationalization plan. Another
interesting note is both Track 1 and 2 levelized tariffs are based on gas reference
price of RM42.24/GJ (RM44.6/mmBtu) i.e. market prices. It is clear the
government will have to meet this commitment as the winners of Track 2 will be
lowering their current IPP rates in view of a PPA extension.
YTLPOWR’s Malaysian
IPP assets are left out! However, YTLPOWR's Malaysian IPPs (CCGT plants)
were not on the list. YTLPOWR had the advantage in cost of funding, which will enable
much more competitive bids vs. the likes of Segari and Genting Sanyen. However,
today’s outcome should no longer be a surprise to investors given that the
government appears to be consolidating the sector among the three key power
players (Tenaga, Malakoff, 1MDB).
Source: Kenanga
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