Singapore’s Energy Market Authority (EMA) plans to revamp gas procurement framework and this will not have a long term impact of YTL Power International Berhad (YTLP), according to CGS-CIMB Research (CGS-CIMB).
In its Company Flash Note today (Oct 24), the research house said that Singapore’s Energy Market Authority (EMA) plans to create an entity (Gasco) that will centrally procure and supply gas for the power sector.
It said that EMA believes that this would ensure sufficient and secure gas supply and offer a long-term solution to the recent spikes in Singapore’s electricity prices.
Following this development, CGS-CIMB sees limited near-term earnings impact to YTLP from this change, but says there will not be any significant long term impact, as longer-term margins could normalise from the current elevated level.
According to a media release by EMA on 23 Oct, Singapore’s Ministry of Trade and Industry (MTI) and EMA are looking to set up an entity (Gasco) that will centralise the procurement and supply of gas for the power sector.
“Gasco will aggregate gas demand from power generators (Gencos) and purchase the required volumes on their behalf.
“This compares to the current framework that allows Gencos to procure their gas volume requirements independently based on their own commercial terms,” the research house said.
EMA had said that intends to set up Gasco in 2024 and will consult the industry on the details of the centralised gas procurement framework in the coming months.
“Once implemented, this centralised procurement approach will apply to all future gas demand, including gas contract renewals. That said, Gencos will be allowed to continue with their existing gas supply contracts with their respective suppliers until they expire.
Aimed to improve Singapore’s energy security and resilience, EMA believes the existing gas procurement framework does not ensure sufficient gas supply for the power sector, as evidenced during the 2021/22 global energy crisis.
The research house notes that among the key benefits of having a Gasco as the sole buyer of upstream gas for the power sector that the regulator highlighted are a better position to negotiate more favourable contracting terms and optimise supply needs and greater economies of scale.
“It will also allow procurement of gas from diversified source countries to minimise concentration risks and made it possible to enter into longer-term gas contracts for more stable prices and supply.”
The research house said, similar to the temporary price cap (TPC) implemented in Jul 2023, this new framework looks set to further curb excessive volatility in Singapore’s electricity prices.
“It may also, in our view, 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,” it said.
CGS-CIMB added, according to management, YTLP earliest gas contract expiry is end-2025, with some stretching to 2028/2029; as such, any effect from this new framework would only be felt from 2026F onwards.
“Overall, we do not expect any notable impact on YTLP’s near-term earnings, but longer-term margins could normalise from the elevated levels enjoyed in recent quarters.
“That said, our forecasts currently already assume some normalisation from 2024 to 2026 (FY24F/FY25F/FY26F) by 6%, 13% and 14% respectively as well as a further 25% over the longer term.
The research house gives ADD rating on YTLP with an SOP-based TP of RM2.40.
Among the key downside risks it anticipate are sharper-than-expected normalisation in electricity sales margins, and earnings drag from non-core operations.
It could be re-rated should YTLP records better-than-expected quarterly earnings and announces new projects, it added.
