News/ Comments

• TNB has entered into agreement with SIPP Energy to acquire 51% stake in SPG (Southern Power Generation), which was incorporated for the development of Track 4A 2x720MW combined cycle gas turbine (CCGT) power plant project, for a total cash consideration of RM51.00.

• Upon completion of acquisition, SPG will become TNB’s 51% owned subsidiary. Track 4A is now expected to achieve SCOD (Scheduled Commercial Operation Date) on 1 July 2020 (delayed from initial target of mid-2018).

• The estimated project cost is circa RM4.7bn, translating into RM3,310/MW, which is 18.2% more expensive than RM2,800/MW for 1,071MW CCGT Prai Power plant.

• We expect the debt:equity financing ratio to be 80:20. Being consolidated into TNB’s balance sheet, we expect TNB’s net gearing ratio to increase from 38.6% to 46.4%, still within a healthy position.

• However, there was no mention on tariff rate. Based on previous information from Edge Weekly, the levelised tariff is 37sen/kWh for Track 4A (based on reference rate of RM3.80/US$), which is 5.6% lower than 39.19sen/kW that was initially proposed by SIPP and TNB back 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.

• Judging from the 18.2% higher construction cost (vs. Prai Power) and only 6.6% higher tariff (vs. Prai Power), we expect the IRR for Track 4A to be relatively low (even below TNB threshold), similar to previous take over of Track 3B (from 1MDB) back in 2015.

• 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. Shareholders stand to receive higher dividend yields of up to 5% (vs. historical 2-3%) based on the updated dividend payout policy (30-50% of net income)

Source: Hong Leong Investment Bank Research - 4 May 2017