- The Edge Financial Daily today reported that Tenaga Nasional Bhd (TNB) has put in the lowest bid – at slightly above RM8bil – for Edra Global Energy Bhd’s equity portion.

- This is about 20% lower than the competing bid of ~RM10bil from a foreign consortium. The other bid was jointly submitted by a consortium comprising China General Nuclear Power Corp Ltd and Qatar’s Nebras Power QSC. According to the report, which quoted sources, the two parties had initially come in as separate bids.

- With an estimated net debt of RM8.5bil, the bids would place an enterprise value of RM16.5bil-RM18.5bil for Edra.

- If based on pricing, the report noted that the consortium may have an advantage over TNB to win the tender to buy Edra.

- Note that StarBizWeek said over the weekend that a foreign bidder may win the bid with 1MDB remaining as a sizeable minority to ride on the future upside of Edra.

- Based on our back-of-the-envelope calculations, TNB’s net gearing for FY16F would increase to 0.7x from 0.4x if it were to acquire Edra at RM16.5bil. The final binding bid for Edra is due tomorrow with results expected by year-end.

- In our opinion, we think that the sale of Edra to a foreign party may be positive for TNB as it would not strain TNB’s balance sheet. As at end-Aug, TNB’s net gearing stood at 0.5x.

- Nevertheless, pricing may not be sole determining factor as foreign parties are limited to 49% equity stake in local power assets. However, the foreign parties are said to have applied for the restriction to be removed.

- Recall that Edra has 13 power assets with eight located abroad and five domestic plants (see Exhibit 1). According to reports, 1MDB is estimated to have paid ~RM12bil to acquire the assets in 2012-2014 and inherited debts of RM6bil. The assets are said to be valued at RM15bil-RM20bil, which include goodwill of RM3.3bil.

- We maintain our numbers for TNB with a BUY call (FV: RM14.80/share). While electricity demand is expected to slow down (in tandem with GDP growth), we expect the cost over-recovery environment to remain, given the current low fuel costs.

Source: AmeSecurities Research - 5 Nov 2015