- We maintain BUY on Tenaga Nasional (TNB) with an unchanged DCF-derived fair value of RM16.70/share. Last Friday, TNB announced that it had submitted a conditional offer to acquire Edra Global Energy Bhd’s power assets from 1Malaysia Development Bhd (1MDB).

- The conditional offer is subject to the following:-

(i) TNB finalising the confirmatory due diligence process as well as finalising and executing the Share Purchase Agreement;

(ii) 1MDB must provide further information on operations; key conditions must be met;

(iii) No assurance transaction will be concluded; final offer subject to independent and third-party evaluation; and

(iv) Non-interested shareholders will vote on any potential transaction at a general meeting.

- TNB did not provide an indicative price in its announcement.

- As Malaysia’s largest power producer, TNB said it is the “best and most logical buyer”. It added that the assets will be a strong fit for its growth strategy and will further enhance its earnings and cash flow.

- Nevertheless, TNB emphasises that the offer will be dependent upon the conditions being met, and there is no assurance that any transaction will be concluded.

- The announcement is not a surprise as TNB had submitted an indicative non-binding proposal in July. TNB is one of three which made offers to 1MDB. According to reports, the two other bidders could be Qatar’s Nebras Power QSC and Saudi Arabia’s Aljomaih Group.

- Given the lack of details, we are neutral on the news and make no changes to our numbers. Notably, TNB had earlier indicated that it does not intend to pay a premium for the assets. Reports indicate that Edra’s book value ranges from RM15bil to RM20bil, while TNB is believed to have valued Edra at ~RM13bil.

- Note that 1MDB is estimated to have paid ~RM12bil to acquire the assets in 2012-2014 and inherited debts of RM6bil. Assuming a price tag of RM18bil and an 80:20 debt to equity ratio, our back-ofenvelope calculations show that TNB’s net gearing will rise from 0.4x to 0.7x as at end-FY15F.

- Nevertheless, we take comfort from TNB’s recent purchase of Edra’s 70% stake in Jimah East for RM47mil – a discount to 1MDB’s reported incurred project development cost of RM84mil. Also, this latest acquisition will require scrutiny from an independent adviser and green light from TNB’s non-interested shareholders.

- Pending further developments, we maintain our numbers and fair value.

Source: AmeSecurities Research - 19 Oct 2015