The Malaysian government has announced plans to build two nuclear power plants with 1,000 MW capacity each, with the first plant ready for operation in 2021. The move has sparked off protests from various organisations, especially after the recent nuclear disaster in Japan. We believe the government’s plan for nuclear plants will be delayed. The government is also unlikely to go ahead with unpopular programmes ahead of the upcoming election.
Given that power from the Bakun hydroelectric station in Sarawak would not come to Peninsular Malaysia, Tenaga is developing a new 1,000 MW coal-fired power plant on its existing power plant site in Manjung, Perak. Another1,000MW new coal plant will be awarded to either MMC or Jimah Power over the next two to three months.
We gather that two out of the five first-generation independent power producers (IPPs) — YTLP, Sime Darby, Genting, MMC and Tanjong — have agreed to the preliminary terms proposed by the government to extend power purchase agreements (PPAs). We believe deferment of nuclear plant development and commissioning of new gas facilities in Melaka will speed up the first-gen PPA negotiation given the increased gas supply.
PPA extension is a win-win situation for both Tenaga and IPPs, as Tenaga will secure reliable supply at the relatively low replacement cost, while IPPs will see upside in earnings from extension that is not reflected in their valuations.
Rising coal prices will be a drag on Tenaga’s FY12F earnings, but we expect a base tariff hike to take effect in FY12F after the general election. Tenaga’s current depressed valuation offers good entry point for stronger earnings ahead.
YTLP is a “hold” for potential upside from PPA renegotiation. Assuming the returns are at 50% of the existing PPAs, the PPA extension will still enhance YTLP’s FY16F earnings before interest and tax by about RM90 million a year (6% of FY11F net profit) with an assumed capex of RM100 million per annum. We have a “hold” call for Petgas for upside from re-gasification project and 4% yield. — HwangDBS Vickers Research, March 29
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