• Proposed acquisition of a 50% stake in Vortex Solar, which has 365 MW of solar assets in the UK
   
• In line with its 5-year international expansion roadmap to secure up to 5,000 MW new generation capacity by 2020

• Maintain BUY and RM17.00 TP

What’s New

Tenaga Nasional (TNB) announced that it has subscribed for a 50% stake in Vortex Solar Investments S.a.r.l. (Vortex Solar) for a cash consideration of GBP86m (~RM475m), which has also entered into a conditional share sale and purchase agreement with SunEdison YIeldco UK Holdco 2, LLC to acquire solar photovoltaic project companies that own and operate solar assets with a combined net installed capacity of 365 MW in the UK. The entire transaction is expected to be completed by September 2017.

The solar energy assets have an average age of two years and an estimated useful life of 30 years. They are backed by 15-year power purchase agreements secured with creditworthy off-takers and supported by renewable obligation certificates for 20 years.

The proposed subscription is in line with TNB’s 5-year international expansion roadmap to secure up to 5,000 MW new generation capacity internationally by 2020, including up to 250 MW of renewable energy (RE) projects. The proposed transaction will increase TNB’s RE net capacity to 252 MW after including 70 MW net capacity in Turkey and India, surpassing its target.

While the assets are expected to be earnings accretive upon completion of the deal, TNB’s generation capacity will only increase by 1.5%.

Therefore, we maintain our earnings.Forecast for now as the additional earnings contribution is likely to be minimal. We reiterate our BUY rating on TNB as it is the largest beneficiary of the incentive-based regulation framework for the utilities sector in Malaysia. Its valuation is compelling at 10x FY17 PE with an FY17 dividend yield of 3%, and is underpinned by strong earnings clarity and steady power demand growth in Malaysia.
 

Source: Alliance Research - 9 Jan 2017