KUALA LUMPUR: UOB Kay Hian Malaysia Research is retaining its Overweight recommendation on the utilities sector with Malakoff and Gas Malaysia as the defensive plays amid the volatile market.
The research house said has a Buy on Malakoff with a target price of RM2 and a Hold on Gas Malaysia with a target price of RM2.75, underpinned by good earnings visibility and high dividend payout mandates (70%-100% of net profit).
“We project 2016 net dividend yield of 4% and 4.8% for Malakoff and Gas Malaysia respectively. For Gas Malaysia, the implementation of the Incentive Based Regulation (IBR) in 2016 – at 8.5% return on capital -- will help to anchor Gas Malaysia’s near-term earnings.
“Key re-rating catalysts for the sector include Tenaga Nasional or independent power producers (Malakoff, YTL Power or 1Malaysia Development Bhd) winning new power plant contracts from the Energy Commission.
“First-generation independent power producers (IPPs) getting short-term power purchase agreements (PPAs) to plug the temporary shortfall in generation capacity by 2017-18, and strong economic growth to driver better-than-expected demand for electricity,” it said.
UOB Kay Hian Research said The Star reported that of the four bidders who were reported to be interested in Edra Energy, three are foreign names, with Tenaga Nasional being the sole domestic name.
“As such, it is still not known if the transaction would be the first to see foreign shareholders owning more than a 50% stake in power plants. 1MDB’s power assets is valued at some RM18bil,” it said.
Early last week, 1MDB reportedly shortlisted several foreign parties, including CGN Meiya Qatar’s Nebras Power QSC and Saudi Arabia based ACWA Power International, for the sale of Edra. The sale of Edra Energy is part of 1MDB’s rationalisation plan to reduce its debts of close to RM42bil.
Among the foreign parties, at least one - Hong Kong-based CGN Meiya Power Holdings Co Ltd - has confirmed it is interested in 1MDB’s power assets and has been in talks with the latter.
At the moment, foreign bidders are restricted to owning no more than 49% of the plants and are generally encouraged to team with a local partner to own power plants. This is a practice that has been adopted by the Energy Commission when it put up power plant projects for a competitive bidding process.
“While the market appears to be wary of foreign shareholding limits, we understand from the regulator that the limit can be increased with the Cabinet’s approval, national interest – which is perceived to be at stake - can be protected by specific terms and conditions set in the PPAs between a wholly-owned foreign entity and the regulator, to ensure no sudden threat to the stability of electricity supply.
“Based on previous media reports, TNB’s bid for Edra appears to be one of the lowest bids, suggesting that overseas bidders may be more interested in gaining a footprint into Malaysia and other emerging regions like Bangladesh, Egypt and Sri Lanka. Nevertheless, with Tenaga being the only local bidder, sentiments may remain weak in the near term,” it said.
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