Investment Highlights

• Tenaga announced a memorandum of understanding (MoU) with PT PLN (Persero) for a proposed development of a 2x200MW coal-fired power plant in Kalimantan, Indonesia. Persero is an Indonesian state-owned utility company.

• Apart from the development of the power plant, the MoU encapsulates the supply and export of electricity to Sabah from the proposed power plant. The MoU involves Sabah Electricity (SESB) as well, which provides Sabah’s electricity generation, transmission and distribution. SESB is part owned by Tenaga (83%) and the Sabah state government (17%).

• The parties involved have a period of 2 years to crystalise and determine the feasibility of the project. Details and terms for the project will be shaped over the course of the MoU with discussions on the business models, associated risks and financing options in their infancy.

• The project was initiated by Malaysian Prime Minister Datuk Seri Najib Razak and his Indonesian counterpart, President Joko Widodo earlier in March this year. The MoU is aimed to enhance bilateral cooperation and improvement in power supply stability in Sabah and Kalimantan.

• In relation to Sabah’s generation development pipeline, the MoU could further enhance Sabah’s reserve margin. Based on the Energy Commission’s 2015 projections, we believe Sabah’s existing reserve margin to be in the region of 25%, comfortably above its minimum requirement of 20%.

• While we like the project falling in line with Tenaga’s ambition of a broader global expansion, we are neutral over the project given terms and details for the MoU have yet to be determined. We maintain our BUY recommendation and DCF-based FV of RM17.82 (WACC: 7.7%, TG: 2.0%).

Source: AmInvest Research - 16 Nov 2017