News  Last Friday, TENAGA offered to acquire all shares that it does not already own in Integrax Bhd (“INTEGRA”; Accept Offer; TP: RM2.75) at RM2.75/share.

 Currently, TENAGA is the largest shareholder of INTEGRA with 22.12% equity stake.

Comments  This came as a surprise to us as it is a non-core business and all these while TENAGA was merely a passive shareholder in INTEGRA. In fact, the integrated utility company is the largest client of INTEGRA where the latter’s Lekir Bulk Terminal (LBT) in Manjung is to cater solely for Janamanjung Power Plant for coal import. In FY13, LBT contributed 72% of INTEGRA earnings at PBT level. This may explain why TENAGA owns a stake in the port operator.

 The privatisation plan will cost RM644.2m for the remaining 77.88% stake that TENAGA does not currently own. This is just a fraction to its current shareholders’ fund of RM43.2b. Thus, financing is not an issue. INTEGRA’s FY15E (YE: Dec) net profit of RM45m is not even 1% of TENAGA’s FY15E core net profit of RM5.30b. Hence, the reason of earnings accretion is not valid here. Although the offer price of RM2.75/share is higher than our DCF-driven target price of RM2.47/share on INTEGRA and current price of RM2.31/share, the offer price is fair for taking a company private.

 In all, although this is not a core-business, with immaterial earnings contribution and at a 19% premium to market price’s offer, it makes sense to take INTEGRA private on security purpose in ensuring the supply of coal to the power plant. Currently, the 1,070MW Janamanjung Plant makes up 24% of TENAGA’s total generation capacity in Peninsular Malaysia. With Unit 4 (COD: 31/03/15) and Unit 5 (COD: 01/10/17) which come with 1,000MW each, the Janamanjung Plant will contribute c.32% of group generation capacity by 2017. As such, this power plant is important not only to TENAGA but to the country as well.

Outlook  This privatisation plan, if successful, will not have any meaningful earnings contribution to TENAGA and it is more for security reason.

 Falling fuel costs like coal price and lesser consumption of expensive LNG as the coal plants are back in action augur well for TENAGA, which also meant a less-pressing tariff hike in the coming June-Review.

 Moving forward, when a new set of fuel cost pass-through mechanism is in place, TENAGA’s earnings are expected to stabilise. By then, its financial performance would depend mainly on its operational efficiency.

Forecast  No changes to FY15-FY17 estimates.

Rating Maintain OUTPERFORM

Valuation  Price target maintained at RM14.65/share which is based on CY15 15x PER.

 Although the total upside is less than 10%, we maintain our OUTPERFORM call for now pending its 1Q15 results to be released later this month. In addition, we believe the valuation of 15x is not excessive given its sustainable earnings growth with index-linked heavyweight status while the market is currently trading at 16x multiple.

Risks to Our Call  A slowdown in economy growth which will affect electricity demand.

Source: Kenanga