The group’s longer-term margins could normalise from the elevated levels enjoyed in recent quarters, CGS-CIMB Research said.
PETALING JAYA: CGS-CIMB Research sees limited near-term earnings impact for YTL Power International Bhd
from Energy Market Authority (EMA) of Singapore’s latest move to revamp the gas procurement framework.
However, the group’s longer-term margins could normalise from the elevated levels enjoyed in recent quarters, it added.
EMA plans to create an entity (Gasco) that will centrally procure and supply gas to the power sector in Singapore.
Gasco will aggregate gas demand from power generators (Gencos) and purchase the required volumes on their behalf.
The regulator highlighted key benefits of having Gasco as the sole buyer of upstream gas for the power sector.
These include a better position to negotiate more favourable contracting terms and optimal supply needs, greater economies of scale and the ability to procure gas from diversified source countries to minimise concentration risks and ability to enter into longer-term gas contracts for more stable prices and supply.
The move would ensure a sufficient and secure gas supply and offer a long-term solution to the recent spikes in the republic’s electricity prices.
CGS-CIMB Research, in a note to clients yesterday, said: “Our initial take on this is that similar to the temporary price cap (TPC) implemented in July 2023, the new framework looks set to further curb excessive volatility in Singapore’s electricity prices.”
The research house is of the view that this would create a more level playing field among the Gencos as it would effectively eliminate any gas price advantage.
Profit margins would, thereby, need to be driven mainly by plant efficiencies.
CGS-CIMB Research said that according to YTL Power management, the group’s earliest gas contract expiry is at the end of 2025, with some stretching to 2028 and 2029.
“As such, any effect from this new framework would only be felt from 2026 onwards, in our view.
“Overall, we do not expect any notable impact on YTLP’s near-term earnings, but longer-term margins could normalise from the elevated levels enjoyed in recent quarters.”
That said, CGS-CIMB Research’s current forecasts already assume some normalisation in financial year 2024 (FY24) by 6%, FY25 by 13% and FY26 by 14%, with a further 25% over the longer term.
The research house has an “add” call on the stock with a sum-of-parts-based target price of RM2.40.
It noted that the key downside risks include sharper-than-expected normalisation in electricity sales margins and earnings drag from non-core operations.
The re-rating catalysts are better-than-expected quarterly earnings and new project announcements.
