News

It was reported yesterday that the Minister of Energy, Green Technology and Water said the Cabinet has given its nod for TENAGA’s takeover of Project 3B from 1MDB, for an undisclosed sum. The Minister said TENAGA has requested a small revision to the tariff rate because the project is six months late and the exchange rate has changed. The Minister also added that the tariff rate is yet to be finalised.

On the other hand, TENAGA also made an announcement to the Exchange yesterday that it has yet to receive any official notification from the government pertaining to the takeover of Project 3B.

Comments

This comes as no surprise as TENAGA’s CEO had already acknowledged (in mid-May) that TENAGA is keen on taking over Project 3B as any delays in the project would result in a power shortage in the future. However, the CEO stressed that if the national utility company does take over the project, it would not be a bailout as it would not pay a premium.

To recap, in Feb 2014, the EC named 1MDB and its partner Mitsui Co Ltd as the preferred bidder for Project 3B, and subsequently in June 2014 awarded the 70:30 consortium the contract to build a RM11b 2,000MW ultra super critical coal-fired power plant in Jimah, Negeri Sembilan. The plant was to be ready in Nov 2018, and the second unit in May 2019. However, it was later reported that the project could be delayed as it has yet to solve financing issues.

Ever since the CEO’s statement, TENAGA has been facing selling pressure where its share price has fallen >12%, and >16% from the recent peak. Yesterday, post the Minister’s statement, the share price tanked >6% before settling at RM12.60 which was 4.26% lower than Wednesday’s closing price.

Given that there are no details of the takeover, such as; (i) terms of new tariff rate, or (ii) additional sums to be paid to 1MDB, we are unable to assess the merit of this takeover. In our opinion, as long as TENAGA is not paying additional payments to 1MDB for taking over this greenfield project, it could be a fair deal to TENAGA. We believe the yesterday’s sell-down was excessive, but the negative perception of the 1MDB-fiasco may explain the heavy sell-down, which was not fundamentally-driven.

Outlook

TENAGA would continue to face selling pressure as long as the 1MDB-fiasco is unsettled.

Operationally, after a strong 1H15, TENAGA is likely to face a weaker 3Q15 as the 2.25 sen/kWh rebate for Mar-Jun 2015 will be reflected then. The rebate would increase operating cost by RM545m in 3Q15. Should the government’s commitment towards a fuel cost pass-through mechanism stay beyond June 2015, the strong earnings shown in 1H15 will be a one-off event as future earnings would depend mainly on its operational efficiency as fuel cost will be passed through on a six-month laggard basis.

Forecast

No changes to FY15-FY17 estimates.

Rating

Maintain MARKET PERFORM

Valuation

With a lower 5-year moving average of 12.8x from 14.3x previously, our new price target is now reduced to RM12.78/share from RM14.32/share previously.

Risks to Our Call

A slowdown in economy growth which will affect electricity demand.

Source: Kenanga Research - 19 Jun 2015