- 1Malaysia Development Bhd (1MDB) announced yesterday that it has executed a share sale and purchase agreement to dispose its entire ownership of power assets to China General Nuclear Power Corp (CGN Group) for RM9.8bil.

- In a media statement, 1MDB said that it is selling its ultimate ownership in all of its energy assets held under Edra Global Energy Bhd and its subsidiaries.

- The companies are Edra Solar Sdn Bhd, Edra Energy Sdn Bhd, Powertek Energy Sdn Bhd, Jimah Teknik Sdn Bhd, Jimah O&M Sdn Bhd, Mastika Legenda Sdn Bhd and Tiara Tanah Sdn Bhd (collectively known as Edra operating companies).

- 1MDB said CGN Group will pay the equity value in cash and assume all the relevant gross debt and cash (as at end-March 2015) of the companies.

- The transaction is expected to be completed in Feb 2015.

- The announcement is in line with news report that the share sale agreement is expected to be signed this week. However, media reports had noted that a China-led consortium comprising CGN and Qatar’s Nebras Power QSC was the one to sign the agreement. It appears from the statement that Nebras is not involved in the purchase. Also, there were expectations earlier that 1MDB may retain a minority stake in the power assets but this does not appear to be the case.

- Based on reports, the winning bid is ~25% higher than TNB’s bid of RM8bil for the power assets. It is reported that Edra has a net debt of RM8.5bil.

- Recall that 1MDB had paid ~RM12bil for the power assets and inherited debts of RM6bil since 2012. Edra has 13 power assets (eight foreign and five domestic plants) in its portfolio.

- The media statement said CGN Group’s bid was chosen due to “value maximisation, acceptable commercial terms, and certainty of transaction execution”. It is expected that the Group would receive an exemption from the 49% cap on foreign ownership of domestic power assets.

- While details are scant at this moment, we believe that the news has removed an overhang on TNB’s share price due to concerns that it might purchase the assets at a premium. It is still too early to ascertain any impact on the domestic plants’ existing power purchase agreements (PPAs) and operations. All in, we maintain our OVERWEIGHT stance on the sector, with BUY calls for TNB (fair value: RM14.80/share) and Malakoff Corp (fair value: RM2.10/share).

Source: AmeSecurities Research - 24 Nov 2015