Utilities - Expect a quiet 1Q13 due to GE

We maintain an OVERWEIGHT on the Power Sector. 1Q13 maybe a quiet quarter for power-related stocks as GE is nearing while many events (Malakoff’s listing, tariff reviews, stabilization funds, new plant awards) is  likely to happen after 1Q13. We advise investors to accumulate TENAGA (OP; TP: RM8.05) prior GE announcement in view of Jun-13 tariff review, which could see roll-out of PEMANDU’s subsidy rationalization plan. This will be viewed as a sector rerating, particularly for Tenaga as it means a reduction of future fuel cost risks. YTLPOWR (MP; TP: RM1.51) will likely remain range-bound given expectations of flat quarterly dividends and thin FY13E net yields of 3.5% as they are hoarding cash for global M&As; however, we do not discount any possibility of M&A announcements. The listing of Malakoff is in 2Q13 and MRT Line 2 news flow is expected to train investor’s attention to MMC (MP; TP: RM2.80) despite possibly weak earnings in 1H13. Maintain NEUTRAL on Water, although we have OUTPERFORM on Puncak (TP: RM2.85). It’s a tactical recommendation as the counter performance is solely depending on the outcome of the upcoming GE. 

3Q12 within. Tenaga and YTLPOWR earnings met our expectations. Tenaga did observe better fuel cost dynamics (lower coal cost and higher gas supply) while earnings visibility is improving given fuel compensations; government reassures that higher gas costs from Melaka RGT supply, will be ‘neutral’ to Tenaga. YTLPOWR disappointed in dividends, although earnings met expectations as they continue to hoard cash for any M&A opportunities. MMC missed estimates due to higher expectations for its construction division, which is a mainly Gamuda-MMC JV contribution. Puncak came below our estimates as well due to higher operating expenses and lower-than-expected O&G margins.

4Q12 saw successful Track 1 and 2 awards, which respectively entails; 1) Tenaga winning the bid for Prai (1071MW) gas plant (already awarded EPC); 2) three 1st Gen IPPs (35% of 1^st Gen) getting Track 2 PPA extension at new levelized rates, namely 1MDB’s Genting Sanyen, Segari (MMC’s Malakoff) and Tenaga’s Pasir Gudang plant. Savings from lowered capacity payments (c.RM300-350m p.a. until 2016) will be earnings neutral for Tenaga and will likely be channeled into the stabilization fund; the fund is meant to help to mute the full impact of tariff hikes to customers since increases in subsidized gas prices will be NEUTRAL for Tenaga. We strongly believe PEMANDU’s subsidy rationalization plan to move gas towards market prices over a 5-year period will be implemented. As it is, both Track 1 and 2 rates are based on gas reference prices of RM44.6/mmBtu, which is equivalent to market prices. The Melaka RGT plant delivery was delayed to Jan-13. Once it comes online, we expect the Power sector to off-take an initial 200mmscfd at market prices (c.15% of gas requirements); however, it will be ‘neutral’ for Tenaga. 

1Q13 maybe quiet. Suruhanjaya Tenaga (ST) is preparing for further plant ups to cater for the rise in electricity demand beyond 2016 and we understand demand beyond 2016 may require another 600MW p.a. based on 3.5% p.a. unit demand growth. However, we believe this will likely be a 2H13 event as the upcoming GE will keep the political landscape occupied. Tenaga is in the most advantageous position to win new power plant bids as it is likely to offer the lowest IPP tariff charge. Tenaga’s future earnings risks are minimal as coal cost is trending lower while usage of other more expensive fuels (e.g. MFO/diesel) due to shortages in gas supply will be continue to be compensated. The next tariff review will be in Jun-13, assuming GE has passed, and we expect news on the stabilization fund to emerge as there maybe other sources of funds. 

YTLPOWR share price may continue to range-bound with expectations of flat quarterly dividends (FY13E: net dividend yield of 3.5%); however, there is a possibility of M&A announcements. MMC will be more attractive from 2Q13 onwards as listing of Malakoff will be in 2Q13, which will unlock cash and value; we hope that valuations and dividend yields are compelling as the market may continue to favor high alpha stocks next year. MMC’s earnings will be compelling in 2H13 as MRT works’ contributions become more significant. Although Puncak earnings missed our mark given weaker O&G contributions, the division is only a small fraction of Puncak’s value at this juncture. We still expect the takeover deal of its concession to be the immediate re-rating catalyst, although it is likely a post GE affair. In the meantime, Puncak is also actively looking to buy O&G assets.   

Source: Kenanga