• TNB Remaco expanding into India with GMR Energy

• GMR Energy owns 2.6GW of operational capacity

• Though small, underpins plans to increase overseas contribution to 20% of earnings

• Re-affirm BUY at unchanged DCF-derived target price of RM16.80/share. 4% yield is attractive

Remaco expands into India. Tenaga, via subsidiary, TNB Remaco, signed an MoU with Indian based GMR Energy Limited for a collaboration in power plant operations & maintenance (O&M) venture in India. GMR Energy is a 30%-owned associate of TNB, acquired in November last year. Both parties will invest in a facility in India, but in the meantime, refurbishment works will be done at TNB Remaco’s Malaysian facility. Based on past meetings, we understand that TNB Remaco generates around RM1b in revenue, or circa 2% of group revenue and generates pretax margins of 7%-8%. The bulk of revenues were derived from TNB operations back in 2013 while non-TNB operations made up circa 10%. However, Tenaga had a target to increase non-TNB operations contribution to 40% of revenue%.

Capitalising on relationship with GMR. We do not rule out possibilities of the venture initially capitalising on GMR Energy’s portfolio of 5 operational plants; comprising mainly of coal and gas plants (which is where TNB Remaco’s core competency lies) with a total capacity of 2.6GW. GMR Energy also has one hydro plant (180MW) under construction and another 3 hydro plants (1.8GW) under development stage. We have yet to factor in incremental earnings or capex from the venture pending further clarity on details as the deal progresses. Nonetheless, this is definitely a positive development and underpins Tenaga’s plans to increase overseas contribution to 20% of earnings within the next 8 years.

Recommendation. We re-affirm our BUY call on Tenaga at unchanged DCF-based TP to 16.80/share for now with potential upside bias from this acquisition. We like Tenaga for: (1) Dividend catalyst on the back of FCF yield of ~7% over FY17F/18F, a relatively under-geared balance sheet at 0.35x and Tenaga’s capital optimisation exercise (2) Overseas expansion provides scope for stronger growth in the mid-term (3) Strong earnings visibility post-ICPT implementation. Capital management, overseas expansion and the resolution of its RM2b tax issue with the Inland Revenue Board are key catalysts over the next 12 months.

Source: MIDF Research - 4 Apr 2017