News/ Comments

• TNB has entered into a Subscription and Funding Agreement with Beaufort (wholly owned by EFG Hermes) to subscribe for new equity shares in Vortex Solar Investments (Vortex), representing a 50.0% equity interest in Vortex on a fully diluted basis, for a total cash consideration of UK£86m (RM480m).
• 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 (RM1.0bn) and 30% stake in GMR Energy (India) for US$300m (RM1.2bn).
• In turn, Vortex will acquire Terraform UK2 and Terraform UK3 (from SunEdison Yieldco), which both have certain interest of solar PV project companies that own and operate 24 solar PV farms in UK with a combined net installed capacity of about 365MW (182MW attributable to TNB).
• The portfolio of assets acquired is young with average age of 2 years with an estimated useful life of 30 years. The assets are backed by 15 year Power Purchase Agreements with creditworthy off-takers and supported by Renewable Obligation Certificates accreditation for 20 years.
• 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. The transaction is expected to be completed by the 3QCY17 and will be immediately earnings accretive.
• The acquisition marks TNB first foray into UK renewable market and potentially future expansion. It also serves as a platform for TNB to acquire knowledge and experience in RE technology and best practices.

Risks

• Disruption in energy fuel supply.
• IBR-ICPT suspension.
• Unscheduled power plant shutdown.
• Lower allowable return on assets for Transmission and Distribution segment for the next IBR review in 2018.

Forecasts

• Unchanged.

Rating

BUY ↔

• TNB’s earnings and cash flow are expected to be stable due to the implementation of the IBR/FCPT mechanisms. The expected IBR revision to lower return on regulated assets by 2018 will be offset by new contributions from associates and power plants.

Valuation

• Maintain Buy with unchanged TP of RM17.50 based on DCFE. We remain positive on TNB’s long term growth and strong cash flow. The recent announced change in dividend policy for FY08/17, has reinforced our BUY recommendation on higher dividend payout as part of TNB’s capital restructuring exercise. Shareholders stand receive higher dividend yields of up to 5% (vs. historical 2-3%).

Source: Hong Leong Investment Bank Research - 09 Jan 2017