News

• Follow up on previous announcement, TNB has submitted a conditional offer to acquire 1MDB-EDRA energy assets, TNB wishes to reiterate its conditional offer are subject to: 1. Finalization of due diligence process by TNB; 2. Further information on operations by 1MDB; 3. Independent and third-party evaluation; 4. Votings from non-interested shareholders.

• The acquisition is in line with TNB’s long term growth strategy domestically and internationally. The acquisition will ensure steady and competive price power to the nation as well as establish international presence for future growth.

• TNB’s CEO Datuk Seri Ir. Azman believes TNB is the best and most logical buyer for these asets, given TNB’s position as the sole off-taker of all power generation in Malaysia.

Comments

• 1MDB-Edra Energy assets, consistings of 13 existing power plants with 5,500MW capacity and upcoming Track 4b with 2,000MW capacity. 1MDB has announced that it has received three final, fully funded and binding bids, which is believed to be TNB (Malaysia), Aljomaih (Riyadh) and Nebras Power (Qatar). It seems that TNB is at an advantage position against the other bidders.

• Despite the unfavourable newsflow on 1MDB, we should access the proposal fundamentally in terms of pricing (unknown). We reitirate our view on the pricing, which is negative if TNB acquires the assets at RM12.0bn (1MDB acquisition cost) and assume the debts of RM6.0bn.

• TNB’s net gearing position will increase to 89.6% (assuming RM18bn for the acquisition and addition RM9bn debt for Track 3B) from current expectation of 31.7% by FY08/2015.

Risks

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

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 - 19 Oct 2015