Investment Highlights

• Tenaga Nasional (TNB) announced yesterday that its wholly-owned subsidiary, TNB Repair and Maintenance (TNB Remaco), signed a term sheet agreement with Negeri Sembilan Cement Industries (NSCI) to generate electricity from the waste heat of NSCI’s plants. NSCI is a 100% subsidiary of Cement Industries Malaysia (CIMA), which is in turn a member of UEM Group. We maintain our BUY recommendation with an unchanged target price of RM17.55.

• The term sheet agreement will see TNB Remaco develop, design, construct, operate, maintain and raise financing for the waste heat recovery power plant (WHRPP). The plant is estimated to be valued at RM200mil. As a result of its strive for green energy generation, we believe the project IRR may be close to TNB’s generative WACC of ~8%. In turn, management expects the WHRPP to reduce NSCI’s electricity cost between 9% and 12%.

• NSCI owns two plants located in Bukit Keteri, Perlis and Bahau, Negeri Sembilan. The WHRPP will have a power generation capability of 23MW by recovering the exhausted waste heat from both NSCI cement plants. Both plants have a total combined cement production capacity of 7.2mil tonnes per annum.

• We do not expect the impact to TNB’s earnings to be meaningful. However, we do not discount further waste heat recovery initiatives being explored going forward. Based on our estimates, the cement industry has a production capacity of 32mil tonnes per annum. Amongst the largest cement producers by capacity are Lafarge, CIMA and YTL Cement with a production capacity of 13/7/6mil tonnes per annum respectively.

• We leave our earnings estimates unchanged. Maintain BUY with a DCF-based FV of RM17.55 (WACC: 7.7% terminal growth: 2.0%). Valuations remain compelling at 10.6x FY18 PER with a decent dividend yield of 4.3-4.9% for FY17-19F. We continue to like TNB for its resilient earnings visibility, robust balance sheet and exciting M&A outlook.

Source: AmInvest Research - 12 Oct 2017