News

Last Friday, TENAGA announced that it had already submitted the Letter of Acceptance to EC for the Track 3B project. At the same time, it has also entered into an agreement with 1MDB for the acquisition of 70% in Jimah East Power Sdn Bhd (JEP) or the Track 3B project, for RM46.98m.

Under the agreement, TENAGA does not assume any guarantee of 1MDB. TENAGA’s financial obligations will only be in respect of equity funding of JEP.

Estimated project costs are c.RM11.7b, from previously RM11b, with RM9b debt financing. This is about 77% debt financing.

The acquisition is expected to be completed by 08/07/2015.

Comments

With the acceptance of the project, it means there is no change to the new terms and conditions, such as: (i) new levelised tariff of 26.67 sen/kWh, (ii) Scheduled Commercial Operation Dates (COD) for Unit 1 is 15/06/2019 and Unit 2 is 15/12/2019, and (iii) financial closing date no later than 15/10/15.

Given that the actual project development cost incurred by 1MDB was c.RM83.68m as at 17/04/2015, the acquisition cost of RM46.98m seems fairly reasonable. With the RM9b debt financing, TENAGA’s net gearing could rise to 0.66x from 0.46x, based on 2Q15 quarterly results. This does not appear overly stretched given its strong cash-flow generating ability.

In all, we are positive on the acquisition given the reasonable purchase cost. 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 will continue to come under pressure on fears of overpaying in case of it acquiring the assets.

Outlook

As mentioned above, TENAGA will continue to face selling pressure as long as the 1MDB saga 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) derive a fair value of RM15.78/share while a - 0.5 SB of 5-year mean (9.9x) places the downside risk at RM9.88/share.

Risks to Our Call

A slowdown in economy growth which will affect electricity demand.

Source: Kenanga Research - 6 Jul 2015