News

Yesterday, TENAGA was informed by the EC that the government has approved the transfer by 1MDB of its 70% shareholding interest in Jimah East Power Sdn Bhd (JEP), or Track 3B. The terms and conditions of addendum to the Letter of Award includes: (i) The levelised tariff is fixed at 26.67 sen/kWh (ii) The net capacity of the power plant is fixed at 2 x 1000MW and its efficiency is 39.5% of full load. (iii) JEP shall be jointly owned by TENAGA and Mitsui Co Ltd in the ratio of 70:30 (iv) The Scheduled Commercial Operation Dates (COD) for Unit 1 is 15/06/2019 and Unit 2 is 15/12/2019 (v) Financial closing date no later than 15 Oct 2015 (vi) TENAGA and Mitsui have seven days from yesterday to accept the terms and condition.

Comments

Basically, the new terms and conditions are fairly similar to what TENAGA-Mitsui have jointly proposed such as the levelised tariff is to raise to 26.67 sen/kWh from 25.33 sen/kWh awarded to 1MDB-Mitsui previously. In addition, the CODs are extended by about 6 months from Nov 2018 and May 2019 previously.

While there is no indication of investment cost, we believe it could be higher than the previous RM11b assumption given the weakening of MYR against USD. 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 cashflow generating ability.

We maintain that so long as there is no upfront payment for taking over the project, there is likely no hidden cost involved since it is a green-field project while TENAGA is the ultimate offtaker of the electricity generated; hence the tariff rate may not be important. 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 come under pressure on fears of overpaying in case of acquiring the assets.

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 2H15 as the 2.25 sen/kWh rebate for Mar-Jun 2015 is now extended till Dec 2015 will be reflected then. The rebate would increase operating cost by RM545m in 3Q15 alone. As such, 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 - 30 Jun 2015