News

Yesterday, TENAGA announced that it has submitted indicative non-binding proposals to acquire Edra Global Energy Bhd’s (the utility asset arm of 1MDB) five domestic and eight international power assets without any price indications.

In a separate press release, 1MDB said it welcomes TENAGA’s interest. It also said that it has received indicative, non-binding offers from other local and international parties for its power assets, with no names mentioned.

Comments

This is widely expected by the market after it took over the green-field Jimah East Power or the Track 3B Project from 1MDB recently. This is also the main reason TENAGA’s share price has come under pressure as the market fears TENAGA overpaying for the remaining brownfield power assets under 1MDB’s stable.

To recap, 1MDB paid a total of RM12.0b for these brownfield power assets from three parties between May 2012 and July 2013. The only listed seller, GENTING (OP; TP: RM9.78) reported a one-off disposal gain of RM1.9b from the RM2.34b deal to sell the then Genting Sanyen Power Plant (now known as Kuala Langat Power Plant) to 1MDB. 

As such, the probability of overpaying for the other two sellers, namely Tanjong plc and Negeri Sembilan Royal family, is possible. The million-dollar question is how much TENAGA is willing to pay for these assets if the proposal is accepted by 1MDB. A quick comparison is MALAKOF (OP: TP: RM2.22) which relisted its effective installed capacity of 6,036MW IPP assets at RM9b in May which have similar life span as 1MDB’s effective installed capacity of 5,594MW. In all, the pricing of these assets is very crucial although TENAGA has the financial strength to take over them.

Outlook

As mentioned above, TENAGA will continue to face selling pressure as long as the 1MDB saga remains 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 now extended until Dec 2015 will be reflected then. The rebate will increase operating cost by RM545m in 3Q15 alone. As such, the strong earnings shown in 1H15 would 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 SD 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.