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Thursday, October 31, 2013

YTL Power International - Lowest bidder for 2,000MW coal-fired power plant


- We maintain HOLD on YTL Power International (YTLP), but with a higher fair value of RM1.86/share due to the removal of a 15% discount to our unchanged sum-of-parts value of RM1.86/share.

- The Edge Financial Daily reported today that the YTLP has submitted the lowest bid at 22 sen/kWh for the Energy Commission’s tender of Project 3B involving a 2,000MW greenfield coal-fired power plant.

- YTLP, which submitted the bid with Ranhill Power, has proposed Tanjung Tohor in Johor as the site for the new plant which is expected to cost RM12bil and scheduled to be commissioned in stages in October 2018 and April 2019.

- While its lowest bid positions YTLP as the leading contender, The Edge reported that the proposal may have some compliance issue due to its engineering, procurement and construction partner. We suspect YTLP’s technical partner is Marubeni Corp, which has a 15% equity stake in the 1,220MW PT Jawa power plant.

- The other bidders for the tender were Tenaga Nasional, MMC Corp’s Malakoff Corp, Formis Resources and 1Malaysia Development. The second closest bid was 1MDB’s proposal at a brownfield site at Jimah, Negeri Sembilan, which apparently does not appear to be in compliance with the terms for a greenfield site.

- Malakoff, which proposed Pulau Carey in Selangor, submitted a bid at 26 sen/kWh. Surprisingly, Tenaga’s bid at Tanjung Hantu, Segari in Perak turned out to be the most expensive at 28 sen/kWh.

- If YTLP successfully secures this power purchase agreement (PPA), it should significantly improve the stock’s prospects given that its current PPAs for the Paka and Pasir Gudang power plants expire in September 2015.

- Assuming project IRR at 9%, interest cost at 6% and debt:equity ratio of 80:20, we estimate that this project could add 29 sen or 16% to YTLP’s current SOP.

- Upon full completion, we estimate that the project could add RM440mil to the group’s net profit, or 33% of FY16F earnings. But note that YTLP may not have a full 100% equity stake in the project given the presence of its jointventure partner Ranhill Power.

- However, we highlight that any earnings impact will only commence in FY19F onwards. Hence, we maintain our FY14F-FY15F assumptions for now pending an official announcement by the Energy Commission.

- Additionally, the capex commitments together with other overseas investments may continue to constrain YTLP’s dividend policies, with no distribution declared since 1QFY13. The stock currently trades at a fair FY14F PE of 11x within its three-year diluted PE band of 10x-16x.

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