News/Comments

• Persuant to major shareholder Perak Corp (15.74% share ownership) demand for higher offer price, TNB has announced higher offer price of RM3.25/share (from RM2.75/share) for the remaining shares of Integrax, which TNB has not already owned.

• The total expected privatization expense is RM761.3m, which will be internally funded (TNB has RM4.9bn cash as at Nov 2014).

• Based on the revised offered price of RM3.25/share, the offer is valued at 1.5x P/B (as at Sep 2014) and 27.8x PE (annualized for 9M2014 earnings).

Comments

• We note that the offered price is relatively expensive versus industry average and street valuation for the port operator (RM2.28-2.46/share). However, we believe TNB’s decision is vested on protecting its long term interest in Janamanjung power plants.

• 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 RM17.00 based on DCFE.

Source: Hong Leong Investment Bank Research - 26 Feb 2015