News/Comments

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

• TNB has agreed to acquire 1MBD’s 70% stake for a cash consideration of RM46.98m (via internal funds) vs. the actual development cost of RM83.68m incurred by 1MDB, post verification by external advisors and consultants.

• Claims for fraud and active concealment, breach of title guarantee and breach of tax warranties are not subject to limitations within the acquisition agreement.

• The scheduled commercial operation date has been pushed back considerably to Jun 2019/Dec 2019 (from Oct 2018/ Apr 2019) mainly due to the failure of 1MDB to raise the necessary fundings for the project.

• The estimated financing cost has increased to RM11.7bn (from initial estimated RM11bn) after taking into account of higher foreign exchange rate (vs. US$) and interest rate.

Comments

• We take positive note on the immaterial 6-7% increase in the estimated project cost despite the significant 15% depreciation of RM against US$ over the year. The hike of 5.3% in levelised tariff to 26.67sen/kWh may well overcompensate the higher construction cost and improve the IRR for the project.

Positives

• ly, TNB does not assume any guarantee on 1MDB. TNB will only be obligated for the equity funding of JEP, existing project liabilities of JEP (expected to be minimal as at the acquisition date) and upcoming debt fundings (estimated at RM9bn).

• We are positive on the revealed information, given TNB’s stand in upholding shareholders’ interest while ensuring long term sustainability of power supply to the nation.

Risks

• Disruption in energy supply (coal and gas).
• Government delay tariff revision.
• Unscheduled power plant shutdown.
• Depreciation of RM.
• Increased fuel cost (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 sell down is overdone, we remained positive on TNB’s long term earnings growth.

Source: Hong Leong Investment Bank Research - 6 Jul 2015