• Takes control of Track 4A

• Tenaga re-assuming the project signals possibility of renegotiated terms

• Re-affirm BUY at unchanged DCF-derived target price of RM16.80/share. This liquid index proxy is deeply undervalued

Takes control of Track 4A. Tenaga is taking a controlling stake in Track 4A after announcing the acquisition of a 51% stake in Southern Power Generation Sdn Bhd (S/B) (Track 4A) for RM51 from SIPP Energy. Track 4A is now expected to achieve commercial operation date on 1st July 2020. The project is reported to cost ~RM4.7b.

Positives from the move. The acquisition will: (1) Enhance the certainty of completion for the project given Tenaga’s expertise (2) Increase Tenaga’s generation market share from the current 54% (3) Value accretion to Tenaga (4) Enhance reserve capacity, which is currently estimated to stand at ~30%.

After long delays. Track 4A, which entails a 2x720MW CCGT plant in Pasir Gudang was originally scheduled to come on-stream in June 2018. It was conditionally awarded to SIPP in May 2014 with the participation of YTL Power and Tenaga. To ensure power generated from Track 4A is competitively priced, the EC set a condition that the levelised tariff for the plant must be comparable to that of TNB Prai, which is at 34.7sen/kwh.

Renegotiated terms? At this rate, however, TNB Prai was reported to have just managed an IRR of just above mid-single digit, which looked pretty unattractive and was rumoured to have been one of the reasons SIPP’s partners i.e. YTL Power pulled out of the project, and eventually Tenaga. Considering the return of Tenaga now to the project, there could be the possibility that the terms has been renegotiated.

Recommendation. Pending further details on the project as it materialises, we maintain our BUY call on Tenaga at unchanged TP of RM16.80/share. At a 6%-7% IRR, we estimate marginal; >1% NPV/share enhancement to our existing DCF-based target price. Assuming a RM4.7b project cost as reported, Tenaga’s net gearing will nudge up to 28% from the current 21%, but the project cost is likely to spread over the next 3 years.

Source: MIDF Research - 4 May 2017