News/Comments

• TNB has received an invitation letter by Energy Commission to take over 1MDB-EDRA Energy’s 70% stake in Jimah East Power (JEP) for the development of 2 x 1,000MW coal fired power plant (Track 3B) in Jimah. The remaining 30% stake will still be owned by existing partner Mitsui Corp.

• The acceptance on the invitation is subject to: 1. TNB-Mitsui Consortium will undertake all obligations of JEP as the power plant developer and appoint relevant EPCC contractor; 2. The firm and final levelised tariff shall not exceed 26.67 sen/kWh. No further adjustments to the levelised tariff will be allowed for any reason whatsoever; and 3. The occurrence of Financial Closing Date shall not be beyond 15 October 2015.

Comments

• Information on the takeover exercise remain skanky. We are unsure if the exercise involve payments from TNB to 1MDB and any debt transfer (debt obligation within JEP).

• The revised tariff of 26.67sen/kWh was 5.3% higher than the initial 25.33sen/kWh rate bid by 1MDB-Mitsui consortium back in Mar 2014. We believe the revised rate is meant to justify the depreciated RM (against US$) of circa 15% as well as higher interest cost since Mar 2014.

• We expect the IRR for track 3B to remain relatively low (even below TNB threshold) despite the revised higher tariff. Nevertheless, we believe TNB taking over track 3B is the best alternative over the longer term, in order to ensure reliability and security of power supply for the nation by 2018-19.

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. We believe the recent share sell down is overdone, we remained positive on TNB’s long term earnings growth.

Source: Hong Leong Investment Bank Research - 22 Jun 2015