News

Yesterday, 1MDB announced that it has executed a Share Sale and Purchase Agreement with China General Nuclear Power Corporation (CGN) for the 100% sale of its power assets under Edra Global. CGN will pay an equity value of RM9.83b in cash and assume all the relevant gross debt and cash based on valuation as at 31 Mar 2015. The transaction is expected to be completed in Feb 2016.

Comments

The announcement is significantly positive to TENAGA as a major price catalyst, although it did not get to acquire the brownfield power assets. We believe the RM9.83b price tag is a good exit price for 1MDB but may not be attractive for the buyer as we had estimated previously that Edra Global should be valued at not more than RM9b. This is based on MALAKOF (OP; TP: RM2.19) relisting its IPP’s effective installed capacity of 6,036MW assets at RM9b in May this year, which have a similar life span as 1MDB’s effective installed capacity of 5,594MW.

For TENAGA, this will remove an overhanging issue, as market was concerned over the possibility of TENAGA getting and overpaying for the assets, which could trigger a re-rating to the pre-sell-down level of 14x-15x PER. TENAGA’s share price has been under pressure since the takeover of greenfield Project 3B from 1MDB in June and the selling pressure compounded after TENAGA indicated its interest in acquiring Edra Global, which sent the share price to as low as RM10.26 in end-Aug from the peak of RM16.96 in early Feb.

Operationally, the change in ownership of these assets will not affect TENAGA as an energy off-taker as all capacity payments from these power plants are backed by PPAs.

Outlook

Operationally, we expect the over-recovery trend to continue into the near-term judging from the current fuel prices. In addition, with a few coal-fired plants back in action from their outages in 3Q15 coupled with the Janamanjung Unit 4 Plant already commenced on 14 April 2015, coal generation mix should likely increase in the future, which should help to bring down fuel cost further. We remain positive on the ICPT mechanism, which ensure earnings certainty as the fuel cost risk is fully pass-through on a six-month laggard basis. Thus, future earnings will depend mainly on its operational efficiency.

Forecast

No changes to FY15-FY17 estimates.

Rating

Upgrade to OUTPERFORM from MARKET PERFORM

Valuation

We upgrade our price target for TENAGA to RM15.42/share from RM12.90/share as this announcement is expected to clear the overhang issue that had been sapping TENAGA for the past six months.

The new target price is based on 15.3x PER CY16, which is pegged to a +1.5SD of 2-year moving average of 12.5x, from the previous targeted 5-year average of 12.8x.

We believe the new targeted PER, which is in line with FBMKLCI’s valuation, is not excessive given TENAGA’s index weighting and quality earnings profile.

Risks to Our Call

A slowdown in economy growth which will affect electricity demand.

Source: Kenanga Research - 24 Nov 2015