PETALING JAYA: Sentiments are positive all round on the Government’s decision to discontinue its windfall profit levy on independent power producers (IPPs).
In particular, the investment community’s view is that IPPs and the bond market stand to benefit from the decision with a knock-on effect on the banking sector whose asset values are strongly affected by bond prices.
The Government’s decision is not actually to scrap the tax altogether but the original 12 monthly payments have now been turned into a single one-off payment, and the Government may yet get its RM530mil in revenue estimated from the original windfall tax.
So, while IPPs are not expected to benefit from lower cost, it is the “certainty” the move brings, the promise of the payment being a one-off, together with the suspension of renegotiations of power purchase agreements (PPAs) that seem to have satisfied the industry and investors, local and foreign alike.
JP Morgan Malaysia in its report on the IPP sector yesterday said: “This is undoubtedly positive news for the sector with good sense having prevailed in the operating and financial structure of the business and its implications to Malaysian equity and bond markets.
“We expect a significant re-rating in the IPP sector to recover some of the RM7.9bil of equity value that was lost among listed IPPs following the imposition of the windfall tax.”
However, the research house’s earnings forecasts for the two IPPs it covers – YTL Power International Bhd and Tanjong plc – were unchanged for financial year 2009 as the impact of a 30% windfall tax on earnings “remain in place for this year as a one-off charge.”
Market consensus is that Bumiputra-Commerce Holdings Bhd (BCHB) is the bank expected to benefit the most. BCHB is widely regarded as having been involved in the issue of a large portion of bonds in the Malaysian market.
A Citigroup report dated Thursday said: “This is positive for (bond) markets related income, which comprises about 25% of BCHB’s gross revenue.”
CIMB Research, a unit of BCHB, in its report yesterday called the decision “a surprising development”.
“We were surprised by this turn of events which is a further compromise by the Government, which had earlier given the IPPs the choice of paying windfall tax or renegotiating their PPAs.
“This development also appears to let IPPs off easily from contributing equitably towards the rising cost of electricity,” said the report.
According to CIMB Research, the IPPs are the big winners from the decision.
“Although over the longer term they could still be roped in to share the burden of higher generation costs, the immediate impact is clarity on the impact of the windfall tax on their financials and bond repayment abilities,” it said.
Citigroup analyst Julian Chua in his report yesterday said the bond market should return to normalcy gradually.
According to Chua, the windfall tax issue together with capital markets volatility had been weighing on the bond market since the tax became effective on July 1.
In July, new issues of private debt securities fell to just RM1bil from an average RM5.5bil per month in the first half of 2008.
“Our channel checks indicated that secondary market trading has also slowed significantly in the last two months,” he said.
The benchmark 10-year Malaysian Government bonds saw yields falling 160 basis points to 4.85% on Thursday.
While a drop in yield is considered positive, it was still high compared with the 3.8% level in mid-May.
Aseambankers Malaysia Bhd head of fixed income research Tan Chee Wee did not see much immediate impact on the Malaysian bond market in the short term.
“Maybe IPP bonds will see some upside, but the general bond market is still down on concerns of high inflation and political risk,” Tan said.
Meanwhile, rating agency RAM Rating Services Bhd has lifted its negative ratings watch on the private debt securities of Malakoff Corp Bhd, Special Power Vehicle Bhd and Magna Segmen Sdn Bhd with immediate effect. Malakoff, the country’s largest IPP, is a subsidiary of main board-listed MMC Corp Bhd.
RAM Rating chief executive officer Wong Fook Wah said in a statement yesterday “a one-year impact will not be detrimental to the ratings.”
The affected debt issues were placed on ratings watch with a negative outlook on Aug 15.