KUALA LUMPUR (Oct 24): Singapore’s Energy Market Authority's (EMA) plan to set up an entity (Gasco) in 2024 that will centralise the procurement and supply of gas for the power sector may benefit YTL Power International Bhd in the longer term as profit margins of power generators (Gencos) would need to be driven mainly by plant efficiencies, according to CGS-CIMB.

In a client note on Tuesday, the research house said that in light of the 2021/22 global energy crisis, EMA believes that the existing gas procurement framework does not ensure sufficient gas supply for the power sector. The new framework is to ensure sufficient and secure gas supply while offering a long-term solution to the recent spikes in Singapore’s electricity prices.

“Once implemented, this centralised procurement approach will apply to all future gas demand, including gas contract renewals. That said, power generators (Gencos) will be allowed to continue with their existing gas supply contracts with their respective suppliers until they expire.

“The key benefits of having Gasco as the sole buyer of upstream gas for the power sector include a better position to negotiate more favourable contracting terms and optimise supply needs; greater economies of scale and the ability to procure gas from diversified source countries to minimise concentration risks; and the ability to enter into longer-term gas contracts for more stable prices and supply,' it said.

CGS-CIMB also added that it can 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.

YTL Power currently has gas contracts in place, and the earliest of these contracts is set to expire at the end of 2025, with some extending as far as 2028 or 2029.

Consequently, the impact of the new gas procurement framework is not anticipated to be significant until 2026 and beyond.

In the near term, CIMB does not foresee any notable effects on YTL Power's earnings. However, over the longer term, it is possible that longer-term margins could normalise from the elevated levels enjoyed in recent quarters. That said, it pointed out its forecasts for FY24F to FY26F currently already assume some normalisation.  

The research house has maintained its “add” recommendation on the stock with a SOP-based target price (TP) of RM2.40.

It said key downside risks include sharper-than-expected normalisation in electricity sales margins and earnings drag from non-core operations, while re-rating catalysts include better-than-expected quarterly earnings and new project announcements.

At Tuesday noon break, YTL Power shares were trading one sen, or 0.51%, lower to RM1.96, translating into a market capitalisation of RM15.99 billion.