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Friday, October 7, 2016

Brokers Report: Tenaga Nasional Berhad - Site Visit to Kapar Energy Ventures (KEV)

Retain outperform recommendation with unchanged target price (TP) of RM15.55

We visited Kapar Energy Ventures (KEV) recently to have a better understanding on its overall operations, technical issues that are affecting the financial performance of the power plant and its recovery programmes.

The only power plant in Malaysia with triple fuel capability. KEV is located in Kapar, Selangor. 60% shareholding of this second generation Independent Power Producer (IPP) is held by Tenaga Nasional (TNB), while the balance 40% is held by Malakoff. KEV has a generating capacity of 2,420MW and is the only power plant in Malaysia with triple fuel capability, i.e. coal, gas and oil. The power plant was officially opened on 14 March 1987 and converted into an independent power producer (IPP) on 9 July 2004. It has four generating facilities (GF). Power Purchase Agreement (PPA) for GF1 to GF3 will expire in July 2029, while PPA for GF4 will end in July 2019.

Operational performances. KEV has been reporting losses due to multiple technical issues affecting the performance of its power plants. Among the technical issues at KEV are (i) general aging, (ii) siltation at the seawater intake which had caused breakdown to the cooling water pump, (iii) turbine vibration, (iv) defective structure, and (v) boiler tube leakages.

Turnaround plans. Management has engaged RWE, 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 plant’s equipment run efficiently, (ii) suspending suppliers with unreliable equipment and parts, (iii) proposing additional budget to the Board to expedite the rectification program, (iv) reviewing PPA every 3 years to reset rolling UOR to 0%. The first reset was in June 2016 for GF2 and GF3, and (v) proposing RULS 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.

Our view. The on-going initiatives taken by the management has managed to reduce the unplanned outages rate (UOR) for GF3 from c.45% in FY14 to 18% in FY15. During our visit at the end of September, UOR for GF3 has been further reduced to 6.25%, while UOR at GF1 and GF2 were at 4.5% and 1.25% respectively. We opine 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.

Source: PublicInvest Research - 07 Oct 2016

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