News

TNB’s wholly owned Remaco and its JV partner Kharafi National have finally signed the contract to operate and maintain Shuaiba North Co-generation plant in Kuwait, after being in the news since early 2013.

The contract is estimated to worth 88.9m Kuwaiti Dinars (RM1bn) over a 7-year period.

Commissioned since 2010, the plant has a power generation capacity of 780MW and distilled water capacity of 45m gallons per day.

Comments

We are positive on the news as the Kuwait contract marked another success of TNB to expand its non-regulated revenue/income. TNB registered RM2.3bn non-regulated revenue for FY08/12 and aims for RM5bn by 2015.

Remaco has a strong track record in servicing Malaysia power plants (including TNB’s and IPPs), as well as winning some contracts in the international arena such as Pakistan, Myanmar, Indonesia etc.

The contribution from this contract will be marginal (due to large domestic earnings base) as we expect the IRR to be ~10%, which translate into RM50m (RM1bn/2 x 10%) or 13sen/share to TNB valuation. However, the exact value of the contract may be lower, depends on the maintenance involved throughout the contract period.

TNB remained one of our favourites, with the commencement of Melaka regassification plant to ensure the gas supply to the power industry, as well as the upcoming restructuring plan of the power industry i.e. implementation of FCPT (fuel cost past through mechanism) and IBR (incentive based regulations).

Risks

Downside risks:

1) Disruption in gas supply;

2) Delay in tariff revision; and

3) Indonesia implement tax on coal export.

Forecasts

Unchanged.

Rating

BUY

Positives –

• Lower coal price at ~US$90/mt.
• Implementation of automatic FCPT mechanism which eliminates uncertainties about future earnings.

Negatives –

• High commitment on IPPs payments.
• Utilization of coal-fired power plants have reach limit.
• Decision on tariff revisions depends on the government.

Valuation

Maintain BUY with unchanged TP of RM9.05 based on DCFE.

Source: Hong Leong Investment Bank Research - 11 Jul 2013