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Monday, May 19, 2014

YTL Power International - The Fantastic Four(A)


Target RM2.55 (Stock Rating: ADD)

Industry sources indicate that Track 4A has been awarded last week through direct negotiations. We think that it could actually be YTL Power that won the project due to its technical experience with gas fired power plants. However, assuming Track 4A is awarded to another party, Track 4B could be next on the cards. If that doesn't pan out for YTL Power, we then believe that the next move could be privatisation by its parent company. Either way, we expect interest on the stock to increase in the near-term. We maintain our Add call on the stock with an unchanged target price of RM2.55.

What Happened
The Edge Financial Daily reported that the government has awarded the gas fired power plant under Track 4A through direct negotiations instead of an open tender last week, citing industry sources. The article highlighted that the government is accelerating the nation's planting up to avoid power disruptions, thus the direct negotiations for the award of Track 4A. It remains unclear to whom the project was awarded to, although the size of the project is touted to be c.1,400MW. Assuming it is true, this will be the second power plant that is awarded under direct negotiation, with the first being the recently awarded 50MW solar plant to 1MDB.

What We Think
We believe YTL Power is the likely winner for Track 4A. Our belief stems from the fact that YTL Power remains one of the most capable to build and operate the gas fired power plant given its previous experience. Furthermore, YTL Power's Power Seraya in Singapore also gives it an advantage as it has experience in an LNG and non-subsidised fuel market, which the Malaysian power and utilities sector are gradually shifting to. Given both factors, combined with the government's acceleration plans, we strongly believe that YTL Power was the one that was awarded the Track 4A.

What You Should Do
We maintain our Add call on YTL Power with the catalyst being it winning Track 4A, assuming the rumours of a directly negotiated agreement is true. If YTL Power does lose out on Track 4A, we believe there is still Track 4B, which could be another 1,000MW gas fired power plant that would be up for tender. Assuming that doesn't come through as well, we believe privatisation by its parent company, YTL Corp, could be on the cards.

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