News/Com Ments

• According to Edge Weekly, TNB has proposed to acquire 70% stake in the 1,440MW combined cycle gas turbine (CCGT) power plant project (Track 4A) that was previously awarded to SIPP Energy (SIPP).

• The acquisition is meant to provide a strong balance sheet for SIPP Energy to finance the project as well as expertise in managing the project, as existing SIPP Energy lacks strong balance sheet (currently negative equity position).

• Track 4A was initially targeted to start operation by mid- 2018, when Energy Commission (EC) proceeded with direct award to a consortium of SIPP, YTL Power International (YTLP) and TNB back in mid-2014, on fast track basis (as opposed to open tender). Subsequently YTLP and TNB pulled out respectively and now left only SIPP.

• The news also disclosed the levelised tariff of 37sen/kWh for Track 4A (based on reference rate of RM3.80/US$) and indicated potential effective tariff of 42sen/kWh (based on current exchange rate of RM4.40/US$), which is comparable to 40-43sen/kWh for some 50MW solar farms in recent tender awards.

Comments

• Information on the takeover exercise remains sketchy. We are unsure if the exercise involves payments from TNB and any debt transfer (debt obligation within SIPP).

• Based on the indicative levelised tariff of 37sen/kWh, it is 5.6% lower than 39.19sen/kW that was initially proposed by SIPP and TNB in 2015. However, it is still 6.6% higher than 34.7sen/kWh rate for 1,071MW CCGT Prai Power (under TNB) back in 2012.

• Similar to previous take over of Track 3B (from 1MDB) in 2015, we expect the IRR for Track 4A to be relatively low (even below TNB threshold). Nevertheless, we believe TNB becoming the controlling shareholder of Track 4A will serve as the best available choice, in order to ensure power security over the longer term.

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. Shareholders also stand to benefit from higher dividend payout.

Valuation

• Maintain BUY with unchanged TP of RM17.00 based on DCFE. We remain positive on TNB’s long term growth and strong cash flow

Source: Hong Leong Investment Bank Research - 25 Apr 2017