AS in anywhere else in the world, the demand for electricity in Malaysia is closely tied to the country’s economic growth.
For instance, previous reports from Tenaga Nasional Bhd (TNB) showed electricity consumption for the eight months from September 2008 to April 2009 in Peninsular Malaysia dropped 3.7% from the same period last year to 53,304 Gigawatt Hour (GWh). This was the period when the country was most affected by the global economic slump.
Obviously, the industrial and commercial sectors, which consume about 80% of the total electricity generated in Peninsular Malaysia, were the main drag for the country’s electricity demand during that period, while consumption by household held quite steadily.
But with Malaysia’s economy slowly climbing back up the slope, in tandem with most other economies in the world, demand for electricity in the country will likely be more promising for the remainder of the year.
The electricity distribution and sale in Peninsular Malaysia is mainly dominated by TNB, while Sabah Electricity Sdn Bhd (SESB) and Syarikat Sesco Bhd cover Sabah and Sarawak electricity needs.
SESB was formerly known as Sabah Electricity Board before it was privatised in September 1998. The company is currently 20% owned by the Sabah government and 80% owned by TNB.
Syarikat Sesco is a wholly-owned subsidiary of main board listed Sarawak Energy Bhd. The company was formerly known as Sarawak Electricity Supply Corp before it was privatised in July 2005.
The privatisation of the energy sector in Malaysia actually started in 1990 and was marked with the formation of TNB. This was a part of the result of the privatisation initiatives introduced by the Government in the late 1980s.
Analysts are generally bullish on the outlook for TNB, which is currently the most profitable government-linked company under Khazanah Nasional Bhd’s stable. It reported a net profit of RM2.594bil in its financial year (FY) ended Aug 31, 2008.
Analysts believe that the company has the potential of staging another strong performance for FY2009, albeit with probably a lower net profit compared with the previous year.
They believe that the operational conditions have generally turned positive for TNB, as electricity demand had seen the worst in February, when the contraction recorded was 13.8% year-on-year. Electricity demand has improved on a monthly basis since March. Nevertheless, the total electricity demand for TNB’s FY2009 is expected to be lower by 3% to 4% compared to its previous financial year.
With ringgit strengthening against US dollar and yen, TNB is expected to make some translation gains on its foreign currency debts for the second half (2H) of its FY2009.
Analysts estimate TNB’s total forex translation gains for the third quarter to be RM580mil. Considering that the company had posted a total of RM1.5bil forex translation losses in its first half, the sharp reversal would definitely improve market sentiment on the counter.
Another advantage for TNB is the subdued international coal prices, which have declined from around US$161 per tonne in the beginning of September 2008 to around US$70 per tonne currently.
Maybank Investment Research (MaybankIB) estimates TNB’s average coal price for 3QFY2009 to be US$68 per tonne, compared with US$101 per tonne in the first half of its current financial year.
With forex gains and lower coal costs, MaybankIB sees the possibility of TNB chalking a net profit of up to RM1bil for the three months to May, the results of which the company is expected to announce on July 23.
For the six months to February this year, 49% of the total electricity generated in Peninsular Malaysia came from TNB, while the remainder from independent power producers (IPPs) such as Tanjong plc, YTL Power International Bhd and Malakoff Bhd.
The advent of IPPs in the electricity supply chain started in 1992, following a nationwide power outage and a series of major interruptions and rationing. The Government then opened up the industry to the private sector to ensure national power security to cater for the country’s economic growth and to relieve TNB of the burden of financing new power plants.
IPPs are generally bound by long-term power purchase agreements (PPAs) with main power producers such as TNB and Syarikat Sesco Bhd. Under such agreements, which could span up to 21 years, IPPs are to generate and sell electricity units to the main utility companies.
The terms of the agreements are generally favourable as they enable IPPs to operate under a highly protective pricing regime that provides them with significant income and cash flow certainty.
“Hence, even under the current economic downturn, the prospects of the IPPs are relatively better than any other business sectors in the context of earnings stability,” explains Malaysian Rating Agency Bhd (MARC) head of project finance and structured finance ratings Sandeep Bhattacharya.
MARC currently rates two IPPs that have issued RM3.6bil worth of bonds in the market.
RAM Ratings Services Bhd, on the other hand, had ratings on RM28.8bil worth of private debt securities (PDS) issued by 19 IPPs and IPP-related entities as at June 30. Most of these debt instruments have been ascribed with strong “A” grades with stable outlook.
RAM’s acting head of infrastructure and utility ratings Chong Van Nee explains that the strength underpinning the debt ratings of the IPPs and IPP-related entities are attributable to their healthy operating performances and robust cash flow and debt-servicing abilities.
With the general economic conditions improving and hence the demand for electricity on the mend, IPPs are expected to record strong earnings in the quarters ahead. Their future earnings would also be driven by a lack of windfall tax.
To recap, all IPPs were required to pay one-off windfall tax on their profits in the middle of last year. This, analysts say, is evidence that the sector is vulnerable to regulatory risks, although they unanimously agree that such risks have been reduced considerably.
They attribute this to the market-friendly leadership of the country whom they believe would not implement policies that are deemed to dampen market sentiment.
TA Research, in its latest market strategy report, also indicated that it thought the threat of an outright PPA review to be rather subdued. It believed the Government would seek alternative ways, such as regular tariff adjustments, to reduce the cost burden of TNB.
Payments to IPP currently make up about 45% of TNB’s cost structure. Payments to IPPs for FY2009 could possibly exceed RM11bil, especially since the Jimah power plant in Port Dickson would be commissioned this month.
Of the listed IPPs, TA Research likes YTL Power International Bhd and Tanjong plc because it expects both companies to benefit from their accretive acquisitions.
YTL Power, which completed the takeover of Power Seraya in Singapore in March, is expected to see a contribution of RM705mil to group earnings this year.
“But there is upside risk to our estimate if the Singaporean economy recovers faster than expected,” the report said.
For the nine months to March, YTL Power posted a net profit of RM617mil (-18% y-o-y) on revenue of RM3.3bil (+5% y-o-y).
Tanjong, on the other hand, is expected to realise earnings contribution from its acquisition of Bermuda-based Globeleq Ltd which was completed in November 2007. TA Research estimates Tanjong’s earnings to double in FY2010 to RM676mil, compared with RM342mil in the preceding year.
For the first quarter ended April 2009, Tanjong’s core net profit rose 13.3% y-o-y to RM191.4mil, on revenue of RM1.3bil (+14.7% y-o-y).
At Thursday’s closing, YTL Power and Tanjong were quoted at RM2.17 and RM14, respectively.