CIMB Research neutral on power sector, Gas Malaysia top pick


  • Business
  • Friday, 13 Jul 2018

An aerial view of the Cypark Suria Pajam Renewable Energy Park in Negri Sembilan

KUALA LUMPUR: CIMB Equities Research is retaining its neutral stance on the overall utilities sector as there could be more changes in regulations and policies with the new minister in place. 

It said on Friday that although sector dividend yield remains decent at 4% for FY18-19F, it believes the negative earnings and unfavourable macros will not likely support a sector re-rating in the near term.

“Gas Malaysia is our top pick given its stable earnings profile, undemanding valuation and lucrative dividend yield of c.5% for FY18-19F.

CIMB Research pointed out Malaysia is heavily dependent on coal plants, which is not sustainable as the country does not produce coal. 

Coal is likely to be the dominant fuel in the incentive-based regulation (IBR) period 2 (RP2, 2018-2020), making up 61% of the energy mix. 

“Therefore, the ministry is focusing on renewable energy and aims to boost the renewable energy (excluding hydro) generation mix from the current 2% to 20% in the medium term. We believe this will benefit renewable energy players such as Cypark (Add, TP RM2.88),” it said.

CIMB Research views the initiative to lower electricity cost by reviewing independent power producers (IPP) contracts as crucial, given that generation costs account for the bulk of the electricity tariff. 

Under the IBR period 2, 68.5% of the 39.45 sen/kWh average base tariff goes to Single Buyer Generation where 31% is used to pay capacity cost. As of 2017, c.44% of electricity in the Peninsular was generated by IPPs and 56% by Tenaga.

“We see risk for power generators, particularly those with expiring power purchase agreement (PPA) or upcoming plants. Power plants with PPAs expiring in the near term might not get an extension due to the excess power reserve, in our view. 

“For upcoming generation capacity, we see risk in Tadmax Resources’s 1,000MW power plant project awarded by the Energy Commission (EC) on a direct negotiation basis in 2016,” it said.
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