YTL Power’s Indonesian plant crosses major hurdle

Tanjung Jati finalises PPA terms with regulators

PETALING JAYA: YTL Power International Bhd’s 80%-owned Tanjung Jati power plant project in Indonesia is believed to have crossed a major hurdle after having finalised its power purchase agreement (PPA) terms with the local regulators, according to MIDF Research.

With the finalisation of the PPA terms, the project is on track to reach financial close soon.

The independent power producer (IPP) is looking at several options, which may include sukuk financing or US dollar financing, which is a bit more expensive than the former.

“We estimate finance rates to range between 5% and 7%. Construction of the plant is expected to commence next year,” MIDF Research said in a report yesterday.

To recap, Tanjung Jati is a 1320MW coal power plant scheduled for commercial operation in calendar year 2021 with a 30-year PPA up till 2051.

The project is estimated to cost US$2.7bil (RM11b) including land relocation and capitalised interest.

“While we understand the PPA negotiation was prolonged as the local regulators intended to renegotiate rates, returns for the project are still attractive at an indicative 12%-13% internal rate of return (IRR), versus earlier mid-teens IRR guidance,” it noted.

The development comes at a time when the Malaysian power sector is posed to see changes with a push towards renewable energy (RE) and the return of competitive bidding in awarding contracts under the new Pakatan Harapan government.

This has raised some concerns that power plants with local PPAs expiring in the near term might not get an extension due to the excess power reserve.

Notably YTL Power has one domestic Paka IPP under contract extension, according to analysts.

On the Tanjung Jati plant, MIDF Research said that the PPA rates had to be renegotiated as this is an old project awarded based on prevailing rates years ago.

The project was delayed given relocation of the project site to Cirebon from Jepara originally.

YTL Power would also be involved in operation and maintenance for the project hence returns are likely to be at the higher end of the 12%-13% range, it added.

While the development is positive, in the near term, debt at the company is likely to build up to finance Tanjung Jati.

Because of this, MIDF Research said it has adjusted its FY19 forecast earnings down by 14% to reflect higher finance cost, while FY20 forecast earnings is expected to come in the range of RM695mil.

However, it said there are value accretion from new projects.

“Though earnings are tweaked lower due to the debt build-up over the next few years, we also now factor in valuations of both the Tanjung Jati plant and the 45%-owned Attarat Power Company shale plant in Jordan into our sum of parts (SOP) valuation. Both the projects raise our gross SOP by a substantial 52-sen/share or 43%.”

YTL Power also has a 45% stake in Attarat, which would construct and operate Jordan’s first oil shale power plant, located in Attarat Um Ghundran. The project is expected to be in operation in the middle of 2020.

The US$2.1bil 470MW plant included a 30-year PPA with the country’s National Electric Power Company.

Its other partners are China-based Guangdong Yudean Group (45%) and Eesti Energia AS (10%).

Construction, undertaken by the Chinese party, is currently underway.

The project comprised of the power plant, fuel and mixing yard, oil shale mine, water wells and mine infrastructure. Given that this is the first of such plant in Jordan, the concession entailed a very attractive IRR of 19%, noted MIDF Research.

Following the developments, the research firm re-affirms its “buy” on the stock as it is one of the few local proxies to lucrative overseas power plant projects.

“We raise our target price to RM1.55 (from RM1.20 previously) as we factor in the 80%owned Tanjung Jati and 45%-owned Attarat plants into our SOP-based valuation.

“Despite higher finance cost over the next few years, dividend yields are a decent 3.9% over our forecast horizon while valuations are at a discount to the market’s 16x-17x.”

Shares of YTL Power closed five sen up to RM1.22 yesterday.