AmInvestment retains Overweight on power sector

The ministry, in a statement yesterday, clarified the situation on the short-term agreements

KUALA LUMPUR: AmInvestment Bank Research remains  Overweight on the power sector with Buy calls on Tenaga Nasional Bhd and Malakoff Corp Bhd and a Hold call on YTL Power International Bhd (YTLP).

It said on Thursday that due to the strong electricity demand in the seven months of 2016, it believes that its forecasted growth of 3.4% for this year is reasonable (FY15: 2.2%). 

“We believe electricity demand will remain robust in 2H (March-August) given the El Nino effect in the past months and increased consumption. 

“We believe global fuel prices will remain at the current levels on the back of oversupply and low demand,” it said. 

AmInvestment said coal prices are expected to remain depressed on the back of slowing Chinese growth and reduced coal-fired generation. 

Last year saw the biggest decline in global coal consumption and production. Given that fuel prices are below reference, it expects Tenaga to report cost over-recovery and pass on fuel savings to consumers. 

“All in, we estimate 2,833MW of new capacity will be added this year. About 86% of this capacity came on-stream in 1H. 

“With the short-term extensions of existing power purchase agreements (PPAs), we estimate that Peninsular Malaysia’s total installed capacity will increase 19% to 24,562MW from 20,710MW as at end-2015. 

“Major plants on track for COD in 2H include Tenaga’s Tembat (15MW) and Ulu Jelai hydro plants (372MW). Plants that achieved COD in 1H were Connaught Bridge and Tanjung Bin Energy,” it said.
 
AmInvestment said Tenaga is its top pick as it will benefit from stronger electricity sales on strong demand while reporting cost over-recovery as fuel prices remain below reference. ICPT ensures earnings stability. 

“We forecast 5% earnings growth this year (three-year CAGR: 6%) on stable EBITDA margin of 32% and revenue growth of 5%. Maintain Buy with fair value of RM16.6 a share. 

“We expect Malakoff’s earnings to improve in the coming quarters as Tanjung Bin Energy achieved COD in end-March and the PPA extension for the Port Dickson Plant commenced its three-year term. Its JV/associate line should also turn positive this year. Dividend yields are decent at 5%. Maintain Buy with fair value of RM2.05 a share. 

“We maintain Hold for YTLP (FV: RM1.45 a share); YTLP is still in negotiations with Tenaga to sign a short-term PPA extension for its Paka plant. Operations in Singapore will remain challenging while the telco business is expected to remain in the red,” it said.