- According to media reports by The Edge Weekly and Reuters, Tenaga Nasional Bhd (Tenaga) is in the running to take over 1MDB’s Project 3B following numerous delays by the latter, including its failure in obtaining financing for the project.

- We understand that 1MDB had over the weekend called off plans to issue up to RM8.4bil in Islamic bonds, a strong signal of its intention to withdraw from the project. The sukuk had been earmarked for the construction of the Jimah East plant. Note that 1MDB still has until April 2015 to secure financing.

- The 2x1,000MW coal-fired power plant had been awarded to 1MDB and its partner Mitsui & Co back in February 2014 at a levelised tariff of 25.33sen/kWh. The other short-listed bidders included consortiums by Tenaga, YTL Power and Malakoff.

- Meanwhile, it was also highlighted that Tenaga itself appears to be facing setbacks in one of its projects – Track 4A – following its application to the EC for a two-month extension to submit its project documents.

- Track 4A, which was awarded to the Tenaga-SIPP Energy-YTL Power consortium in May 2014, involves the construction of a 1,000MW to 1,400MW gas-fired power plant in Johor. YTL Power had, however, withdrawn from the project.

- Unlike 1MDB’s Project 3B delay, Tenaga’s setback will unlikely lead to a delay in commercial operations as it takes a shorter time to complete a gas-fired plant vs. a coal-fired plant (both are set to commence in 2018). Additionally, we do not anticipate Tenaga to face financing troubles given its strong cash flows and low net gearing of 0.3x.

- Delays in the commissioning of 1MDB’s plant poses a threat to the nation’s power reserve margins – hence, the urgency of the EC to look for alternatives.

- We opine that Tenaga’s assumption of control of Project 3B will be mildly positive for the group as any savings from the IPP payments to 1MDB will be partially offset by costs of operating the plant. Its IRR is reportedly ~6%.

- Pending an official confirmation, we are maintaining our FY15F-FY17F earnings estimates and BUY recommendation on Tenaga. Our DCF-derived fair value is unchanged at RM18.40/share.

Source: AmeSecurities