News

Last Friday, TENAGA confirmed that it has received a letter of invitation from the EC to submit a proposal pertaining to the participation of TENAGA through 70% ownership of Jimah East Power Sdn Bhd (JEP), the Project 3B.

It also mentioned that EC in consultation with the Government has accepted TENAGA’s participation as the lead developer in the project in a consortium with Mitsui Co Ltd. The invitation by EC is subject to TENAGA accepting the terms and conditions of the Request For Proposal and additional conditions as stipulated: (i) The premise that the consortium will undertake all obligations of JEP as a developer and in particular, with respect to the selection and appointment of EPC contractor which also incorporated the principal equipment suppliers, (ii) The firm and final levelised tariff shall not exceed 26.67 sen/kWh, (iii) Financial closing date shall not be beyond 15 Oct 2015;

Comments

This announcement was to confirm the Minister’s statement last Thursday of the government agreeing to TENAGA’s takeover of a 70% stake in Project 3B from 1MDB but subjected to TENAGA accepting the terms and conditions stated above.

This also prompted a rebound of TENAGA’s share price by >2% last Friday. However, we maintain our opinion that so long as 1MDB’s asset sales of the remaining brownfield power plants (under Edra Global) is not settled, TENAGA’s share price would continue to face selling pressure on fears of overpaying.

As long as there is no upfront payment for taking over the project, there is likely no hidden cost involved since it is a greenfield project while TENAGA is the ultimate off-taker of the electricity generated; hence the tariff rate may not be important. Nonetheless, the new level tariff of 26.67 sen/kWh is 5% higher than the 25.33 sen/kWh awarded to 1MDB-Mitsui consortium.

Assuming there is no changes to the total cost of RM11b, TENAGA’s net gearing could rise to 0.65x from 0.46x currently based on 80:20 debt to equity ratio which does not appear overly stretched given its strong cash-flow generating ability.

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 will 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

Our price target is maintained at RM12.78/share for now, which is based on a 5-year average of 12.8x on CY16 earnings.

In the near-term, we believe the share price of TENAGA is not likely to be fundamentally driven given the on-going 1MDB issue. Based on CY16 earnings, a +0.5 SD of 5-year mean (15.8x) would derive a fair value of RM15.78/share while a -0.5 SB of 5- year mean (9.9x) would place downside risk at RM9.88/share.

Risks to Our Call

A slowdown in economy growth which will affect electricity demand.

Source: Kenanga Research - 22 Jun 2015