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Just when we had downgraded the counter to a Neutral on news that margins at Gas Malaysia would be slashed by half, along comes a rumour that MMC’s 51% subsidiary has secured the 1000MW power plant extension for Tanjung Bin. Our shorter term forecasts are unchanged based on the expected 4-year construction period, but our Sum of Parts value is raised to RM3.58. With an announcement likely sooner than later, we remove our 10% discount on its valuation and upgrade MMC back to Trading Buy.
Rumours of 1000MW extension. Just when we had downgraded MMC on news that its Gas Malaysia margins had been slashed by 50%, rumours surfaced that 51%-owned Malakoff has secured a 1000MW extension to its Tanjung Bin coal fired 2100MW power plant in Johor. While nothing is confirmed yet, it seems that the rates for this extension are reasonable considering that it would be for a shorter concession period of 15 years. Malaysia needs the power, Malakoff needs the plant. Recall that this 1000MW extension was one of 2 identified in order to keep Malaysia’s reserve margin above 20% past 2020 even if the 1st Generation Power Purchase Agreements (PPA) are extended.
With the first 1000MW extension being awarded to TNB’s Janamanjung plant while the second is seen as a toss-up between Malakoff and Jimah Power, we had always held the view that Malakoff is the leading contender. Malakoff needs the extension to allow it to grow its capacity beyond the level the company was at when it was privatized in 2007, thus paving the way for its eventual relisting by 2013. Originally, an announcement was to have been made only in 3Q2011 but now it appears as if something might be announced sooner. Profit forecasts up to 2013 unchanged. If the rumours came true, we expect MMC to incur capex of RM4.5bn for the extension, with commercial operation in 2016. As such, our profit forecasts are minimally changed up to 2013. On a Sum of Parts (SOP) basis, the new power plant lifts our SOP value per share by 16 sen to RM3.58 from RM3.42 previously.
Upgrading back to Trading Buy. We had just downgraded the stock to a Neutral on account of the drop in Gas Malaysia’s margins but we had also stated at the same time that we would upgrade the counter if and when it secures the 1000MW extension. While MMC has yet to disclose this new development, our sources indicate that an announcement could come sooner than the September date we had envisioned. As such, we remove the 10% discount to MMC’s SOP value and raise our FV from RM3.08 to RM3.58. The stock is thus upgraded back to a Trading BUY pending the actual announcement.