KUALA LUMPUR (June 23): Research houses have maintained their calls on YTL Power International Bhd with unchanged target prices (TPs) of between RM1.54 and RM1.70 despite news that Singapore, where the company operates 3.1 gigawatts of licensed power generation capacity, plans to introduce a temporary cap on electricity prices from July 1.

Moreover, they viewed that that it is an opportune time to accumulate the stock, which saw a knee-jerk selling reaction following the new industry ruling.  

To recap, the Singapore’s Energy Market Authority (EMA) has implemented a temporary price cap (TPC) for the wholesale electricity market to curb excessive volatility from temporary capacity outages and gas supply shortages, effective July 1 to the third quarter of calendar year 2025 (3QCY2025).

MIDF Research maintained its ‘buy’ call with an unchanged TP of RM1.54, as valuations are undemanding at 7.8 times financial year 2024 forecast (FY2024F) price-to-earnings ratio.

This came after a selldown with a discount of approximately 40% to a 10-year historical mean of 13 times while dividend yields are attractive at 4.6% for FY2023F and at 6.4% for FY2024F.

“Our valuations have yet to factor in YTLP’s (YTL Power's) 45%-owned Jordan shale oil power plant, which we believe could start contributing to earnings soon,” said MIDF analyst Hafriz Hezry.

“YTLP is well positioned to benefit from Malaysia’s lifting of the RE (renewable energy) export ban given its advantage in having existing generation and retail operations in Singapore.

“Earnings are set to be boosted by a recovery in Wessex Water’s earnings from its recent April 2023 tariff hike and still strong PowerSeraya earnings from a tight Singapore electricity market,” he said.

Hafriz added that YTL Power could also benefit from the weaker ringgit against the Singapore dollar and British pound.

He said that the new price cap is essentially a switch from the current S$4,500 (RM15,596) per megawatt per hour to a dynamic cap on cost-plus model at 1.5 times to 3 times a combine cycle gas turbine’s long run marginal cost under varying gas spreads scenarios.

“We 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 Seraya should be less impacted,” Hafriz added.

Meanwhile, CGS-CIMB maintained its ‘add’ call and TP of RM1.70, with valuations at 8.4% FY2024F price to earnings and a 33% discount to its 10-year mean of 12.5% and 0.6% price-book value.

It noted that its valuations did not fully capture the earnings prospects from Singapore’s tightening electricity supply market, amid recurring outages from ageing power assets and renewable energy exports over the medium term.

CGS-CIMB’s analyst Dharmini Thuraisingam said prices will be capped depending on the prevailing gas spreads to the long-run marginal cost of generation.

“Also, the EMA will be extending the vesting contracts for a further five years to June 30, 2028, following its expiry at the end of this month,” said Dharmini.

She expects the new price mechanism to have minimal impact on PowerSeraya's earnings, given the bulk of its volumes enjoyed largely fixed margins.

“We view the recent 8% sell-off on YTLP shares following the TPC announcement as overdone,” said Dharmini, adding the sell-off is an opportunity to accumulate.

At the time of writing, YTL Power’s share price was three sen or 2.52% higher at RM1.22, valuing the company at RM9.95 billion.