• TNB announced to privatize its 22.1% owned port operator Integrax for a cash consideration of RM2.75/share (20% premium to last traded price of RM2.31/share). The total expected privatization expense is RM644.2m, which will be internally funded (TNB has RM8.1bn cash as at Aug 2014).

• Integrax is a the port operator at Lumut Port (Lumut Maritime Terminal and Lekir Bulk Port), which has a 25-year concessionaire to handle the import of coal supply for TNB’s owned 4,100MW Janamanjung coal-fired power plant.

• Based on the offered price of RM2.75/share, the offer is valued at 1.3x PB (as at Sep 2014) and 23.5x PE (annualized for 9M2014 earnings). Industry analysts valued the port operator at RM2.28-2.46/share.

Comments

• Despite the relatively expensive offered price, we are positive on the acquisition exercise. We believe TNB’s decision is vested on protecting its long term interest in Janamanjung.

• Note that Integrax has a history of board tussle between the major shareholders concerning the strategic involvement into Vale’s new ore distribution centre in Lumut. At the end, TNB became the major shareholder, when it bought 22.1% stake from one the major shareholders at RM1.60/share and the transshipment agreement with Vale was terminated.

• Nevertheless, there has always been a concern on future potential involvement of Integrax with Vale’s iron ore imports, which may affect the operation of coal import at Lumut Port for TNB’s largest power plant asset . Therefore, the privatization exercise will end any uncertainties regarding the priority of utitizing Lumut Port .

Risks

• Disruption in energy supply (coal and gas).
• Government delay tariff revision.
• Unscheduled power plant shutdown.
• Depreciation of RM.
• Increased cost of energy fuel (coal, gas, LNG and alternatives).

Forecasts

• Unchanged.

Rating

BUY

Positives

• Implementation of IBR and FCPT mechanism which eliminates uncertainties about future earnings .
• Improved power generation from coal -fired power plants.
• Low coal price environment.

Negatives

• Decision on tariff revisions depends on the government.
• Depreciation of RM against US$.

Valuation

• Maintain BUY with unchanged TP of RM16.00 based on DCFE.

Source: Hong Leong Investment Bank Research - 12 Jan 2015