PETALING JAYA: The easing in YTL Power International Bhd
share price following the move by the Singapore Energy Market Authority (EMA) to implement price cap is seen as an opportunity to accumulate the stocks.
CGS-CIMB Research noted YTL Power’s current valuations at 8.4 times financial year 2024 price to earnings which is a 33% discount to its 10-year mean of 12.5 times, and 0.6 times price to book value, does not fully capture the earnings prospects from Singapore’s tightening electricity supply market.
This comes amid recurring outages given the ageing power assets, as well as the potential upside from plans for cross boarder renewable energy exports in the region over the medium term
Hence the brokerage has kept its “add” call on the counter with a target price (TP) of RM1.70 a share.
The EMA has implemented a temporary price cap on electricity to help curb excessive price volatility in the wholesale electricity market as a result of the capacity outages and gas supply shortages in Singapore.
Effective July 1, prices will be capped at a multiplier of 1.5 to three times (depending on prevailing gas spreads) to the long-run marginal cost (LRMC) of generation.
The EMA will also be extending the vesting contracts for a further five years to end June 2028, following its expiry at the end of this month.
CGS-CIMB Research stated the price cap in Singapore will likely have a minimal impact on YTL Power’s as its unit, YTL PowerSeraya, sold about 80% of its electricity sales volume to the retail market with the remaining 20% being sold under the vesting contract scheme and wholesale pool.
“In general, these volumes (80%) are typically locked-in via six to 24-month contracts at largely fixed prices and earn relatively fixed margins, as we understand the company hedges its gas prices accordingly upon signing the contracts,” CGS-CIMB Research noted.
As the sales price is determined by taking into account the LRMC with fair returns built in for the generators, the former earns relatively fixed margins.
CGS-CIMB Research said this is assuming there was a 50/50 split for the balance volumes as well as a more aggressive 8% to 16% resultant impact on Uniform Singapore Energy Price prices.
The research house estimates there will be a potential earnings loss of S$24mil to S$48mil (RM82mil to RM165mil) for YTL PowerSeraya after the implementation of the price cap.
“We have factored in a much larger normalisation in earnings in the coming quarters on the back of our initial expectations of a notable pullback in margins, however, based on the current favourable volume mix, they seem to be holding up well,” added CGS-CIMB Research.
MIDF Research on the other hand said that while it believes the new cap will weed out temporary extreme spikes, it still gives sufficient room for returns as the multiplier is some three times a combined-cycle gas turbine’s LRMC in periods of stable gas prices.
It was also estimated that 75% of YTL PowerSeraya’s revenue are tied to long-term contracts which entails stable rate and margins.
Given the still tight electricity market expected in the next three years with minimal new capacity additions, MIDF Research thinks renewal prospects of the long-term contracts remains favourable.
“We also believe the long-term impact of the new price cap is mainly on the less efficient generators which are typically the last to get on the grid, while incumbents such as YTL PowerSeraya should be less impacted,” the research house said.
MIDF Research maintained a “buy” call on YTL Power and a TP of RM1.54 per share without making any changes to its earnings estimates following the new ruling in the island republic.
