Tenaga Nasional Bhd
(Oct 7, RM14.36)
Maintain outperform with a target price (TP) of RM15.55: We visited Kapar Energy Ventures Sdn Bhd (KEV) recently to have a better understanding of its overall operations, technical issues that are affecting the financial performance of the power plant and its recovery programmes. A 60% shareholding of this second-generation independent power producer (IPP) is held by Tenaga Nasional Bhd (TNB), while the balance is held by Malakoff Corp Bhd.

The power plant was officially opened on March 14, 1987, and converted into an IPP on July 9, 2004. It has four generating facilities (GFs). The power purchase agreements (PPAs) for GF1 to GF3 will expire in July 2029, while the PPA for GF4 will end in July 2019. KEV has been reporting losses due to multiple technical issues affecting the performance of its power plants. Among the technical issues at KEV are  general ageing, siltation at the seawater intake which had caused breakdown to the cooling water pump and turbine vibration.

Management has engaged RWE Technology International, a reputable international engineering consulting company, to assist with the plant’s turnaround plan. KEV is: i) reviewing and upgrading its maintenance, overhaul and engineering practices and guidelines to ensure the plant’s equipment runs efficiently; ii) suspending suppliers with unreliable equipment and parts; iii) proposing additional budget to the board to expedite the rectification programme; iv) reviewing PPAs every three years to reset the rolling unplanned outages rate (UOR) to 0% (the first reset was in June 2016 for GF2 and GF3); and v) proposing redeemable unsecured loan stocks’ interest rate adjustment from 15% to 8% to improve bottom line. At this juncture, management is unable to ascertain when the plant will achieve its full turnaround.

The ongoing initiatives taken by management have managed to reduce the UOR for GF3 from about 45% in financial year 2014 (FY14) to 18% in FY15. We opine that the plant’s earnings will continue to be negatively affected in the near term mainly due to higher repair and maintenance costs. Nevertheless, KEV losses are immaterial to TNB’s overall net profit. We maintain our “outperform” call on TNB with an unchanged TP of RM15.55. — Public Investment Bank, Oct 7