News/  Comments

• TNB has entered into a conditional Subscription Agreement to subscribe for new equity shares in GMR Energy (GEL), representing a 30.0% equity interest in GEL on a fully diluted basis, for a total cash consideration of US$300m (RM1.2bn). The other major shareholders of GEL are GMR Group (India Listed Group), Temasek (Singapore Government Investment Arm) and IDFC Consortium (finance company in India).

• The share subscription is in line with TNB’s 5-year International Expansion Roadmap, to further increase its international power generation capacity post its recent completion in the acquisition of 30% stake in GAMA Energi (Turkey) for US$255m (RM1.02bn).

• GEL has an installed power capacity of 2,300MW (combination of coal, gas and solar) and capacity under construction of 2,330MW (mainly hydro).

• We are positive on the share subscription exercise, which will further enlarge and diversify TNB’s international energy portfolio and improve its international energy exposure.

• GMR Group has been identified by TNB as a suitable strategic partner for TNB in India, given GMR Group’s strong position as one of the largest infrastructure development companies in India with businesses spanning energy, airports, transportation and urban infrastructure. TNB looks forward for new venture opportunities with GMR Group for further capacity expansion.

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

• 1. Implementation of IBR and FCPT mechanism which eliminates uncertainties about future earnings; and 2. Higher coal generation mix to improve margin.

Negatives

• 1. Additional tax assessment of RM2.1bn.

Valuation

• Maintain Buy with unchanged TP of RM16.50 based on DCFE. Remain positive on TNB’s long term growth and strong cash flow.

Source: Hong Leong Investment Bank Research - 10 May 2016