YTL Power's new Indonesian plant not cheap: MIDF Research

PETALING JAYA: The construction cost of YTL Power International Bhd new power plant in Indonesia is considered expensive relative to the average cost incurred for Malaysian projects, according to MIDF Research.
"The implied RM8.8 million per megawatt (MW) construction cost is not cheap if benchmarked against circa 4.5 million-RM5.5 million/MW cost incurred for Malaysian power plant projects," its head of equity Syed Muhammed Kifni head said in a report recently.
He pointed out that Project 3B, the 2,000MW Jimah East coal-fired power plant, for example, is estimated to incur a cost of RM5.5 million/MW.
"The massive RM11.6 billion (RM9.6 billion based on YTL Power's 80% stake) construction cost will cause YTL Power's net gearing to rise to as high as 1.8 times from 1.1 times (as at end-September 2015)," Syed Muhammed said. Assuming an 80% debt funding, he added, this would involve about RM557 million in additional finance cost.
YTL Power, via its 80%-owned PT Tanjung Jati Power, is reported to be embarking on a US$2.7 billion (RM11.6 billion) investment in Indonesia to set up a 2x660MW coal fired power plant. It is known as the Tanjung Jati 'A' Coal Fired Independent Power Project and will be located at Cirebon, West Java. It entails a power purchase agreement with PT Perusahaan Listrik Negara over a 30-year period expiring in 2051, with expected commencement in 2021.
Syed Muhammed said Indonesia entails an electrification ratio of 80%, which compared with the 60% electrification ratio achieved in 2005 is a pretty much decent improvement. More importantly, he added, Indonesia's electricity demand has grown at an average 8% a year compared with Malaysia's 3.5% a year and the republic is bent on addressing this issue.
Syed Muhammed pointed out that compared with a base of 47 gigawatts (GW) in 2013, Indonesia's total installed capacity is targeted to increase to 107GW by 2022, or an average 14% annual growth in capacity over the next seven years.
Indonesia's power sector relies heavily on coal, namely more than 50% of total capacity, while gas makes up about a quarter of total fuel feed.
"We maintain our neutral call on YTL Power at unchanged SOP-derived target price of RM1.60 per share. Our back of the envelope calculation suggests a potential ~6% enhancement to our SOP value (or a total net present value of RM750 million based on the US$2.7 billion project cost and 8% weighted average cost of capital from the new Indonesian venture, but we await further clarity before factoring this into our valuations," Syed Muhammed said.