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Friday, October 26, 2018

Power - No Impact From IPP Cancellations

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Media reports have it that the Energy, Science, Technology, Environment and Climate Change minister Yeo Bee Yin told Parliament yesterday the Government has decided to cancel four independent power producers' (IPP) licenses for non-compliance to various conditions. Two of the projects involve Tenaga Nasional (TNB) as well as Malakoff Corp. Nevertheless, we understand that these were only at the planning stages with no agreements entered into as yet. Hence, no impact to the existing portfolio and earnings of both TNB and Malakoff. We maintain our Neutral call on the sector.
  • Four IPP cancellations. It was reported that the cancellations were due to failure to adhere to conditions stipulated in the offer letters. The four cancelled IPPs are; (1) 700MW gas power plant in Kapar, Selangor, owned by Malakoff and TNB, (2) 1,400MW gas power plant in Paka, Terengganu, owned by Aman Majestic Sdn Bhd and TNB, (3) 300MW gas power plant in Sandakan, Sabah, owned by Sabah Development Energy Sdn Bhd and SM Hydro Energy Sdn Bhd, and (4) 400MW solar power plant owned by Edra Power Holdings Sdn Bhd. These were awarded via direct negotiations. We understand that the development of a new gas-fired power plant with a capacity of 700MW in Kapar, Selangor (by Malakoff and TNB) was a proposal which was supposed to be a potential re-powering of the existing Kapar Energy Ventures (KEV)’s Generating Facility (GF) 4 site upon the expiry of its power purchase agreement (PPA) in July 2019. No contracts have been officially awarded, with this still under the planning stages. To note, Malakoff has a 40%-stake in KEV, while TNB holds the remaining stake.
  • Reserve margin remains at the optimal level. The minister also noted that the national electric reserve margin remained at the optimal level of 32%. If the proposed cancellations projects were continued, it would have increased the reserve margin to higher-than-necessary levels, which then raises the capacity payments as well as electricity bills.
  • Pushing towards renewable energy (RE). The ministry has set a target of 20% of the country’s electricity to be generated from renewable sources by 2025, an increase from 2% of total energy generation mix currently. Among the initiatives are through cheaper funding for RE players and introduction of solar leasing to encourage participation in RE. We believe this should benefit Malakoff as it plans to diversify into waste-to-energy by leveraging from its recent acquisition of Alam Flora, and Cypark Resources given its entrenched position in the RE space.
  • No earnings impact. To note, we had not taken into account the now cancelled projects into our current earnings forecasts on both TNB and Malakoff. Hence, we make no changes to our assumptions. We also believe the cancellation of this proposal will not affect the existing PPA and current operating plants. Given the upside potential to our unchanged TP of RM1.09, we upgrade our ratings on Malakoff to Trading Buy. The current weakness in share price provides an opportunity for investors to accumulate. Meanwhile, we maintain our Outperform call on TNB with an unchanged target price of RM17.81.
Source: PublicInvest Research - 26 Oct 2018

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