We think so. The share price of Tenaga Nasional (TNB) tumbled 40sen or 3.4% from the previous day's closing price and settled at RM11.38 yesterday, the lowest price for more than a year, reportedly on foreign selling. Year-to-date, TNB's share price has lost 17.5%, underperforming the FBMKLCI which is down by only 3.8%. If the negative sentiment is due to the proposed power asset acquisition from 1MDB, we firmly believe that the worst has been factored into the share price with minimum downside risk. The depreciating Ringgit against USD should not be a concern either as 80.9% of its borrowings are RMdenominated, with only 6.3% in USD and the remaining12.7% in JPY as at 31 May 2015. TNB would also benefit from Imbalance Cost Pass-Through (ICPT) framework under the power sector reform as it would enable TNB to pass on higher fuel and generation costs to consumers. We think further weakness in TNB's share price is not justified as the fundamentals of the Group remain intact otherwise, and currently trades at inexpensive valuations of 9.4x and 9.2x FY15F and FY16F EPS respectively. We reiterate our Outperform call on TNB with an unchanged TP of RM14.64 and view the weakness in its share price as an opportunity to accumulate.

Concern on 1MDB’s power asset acquisition? Since the news on a potential takeover of 1MDB's power assets surfaced in May, TNB's share price has dropped by about 20.4% from May's high of RM14.30 to yesterday's closing of RM11.38, wiping out almost RM16.5bn of its market capitalisation. The loss almost equals 1MDB's power asset acquisition being done at the full valuation of RM18bn (as per 1MDB's acquisition cost) which will include RM6bn of inherited debt. Worst case, if TNB is “punished” by factoring in the entire amount, which is very unlikely, its share price could possibly drop to RM11.11. We strongly believe any further weakness is not justified as the worst is already being factored-in, even the assumption of the acquisitions making no earnings contributions. With the government being an interested party on both ends through its ownership of both entities, approval for the transaction will come from minorities. Will they sanction an RM18bn acquisition, if asked to? Not likely.

Concern on depreciating RM against the USD. As at 31 May 2015, TNB's total borrowings are RM24.1bn with RM19.5bn in Ringgit, RM3.1bn in Japanese Yen and only RM1.5bn in USD. There will be very minimal impact from the depreciation of RM as we understand that every 10% appreciation in foreign currency leads to less than 5% increase in its finance costs. Short-term impact of the weak RM on raw materials cost, in particular coal, is not a concern either as we have already imputed higher assumptions into our earnings expectations. While the Ringgit is 3.91 to the US dollar currently, and will average about RM3.76 to USD1 for the entire year if conditions remain as-is, the lower average coal price for 9MFY15 of USD67.3/MT will come out just about equal the USD72/MT at RM/USD exchange of 3.5 which we have imputed. In any case, raw materials cost variances are now addressed by the Imbalance Cost Pass-Through mechanism.

Source: PublicInvest Research - 7 Aug 2015