• Bags new O&M contract in Pakistan

• Largest O&M contract for a single plant

• Remaco rides on Tenaga’s overseas expansion drive

• Re-affirm BUY at unchanged DCF-derived target price of RM16.80/share

Bags new contract. TNB Repair & Maintenance Sdn Bhd (Remaco) bagged a new overseas contract worth USD176m (RM763m) for the operation and maintenance (O&M) of the 1223MW Balloki combined cycle gas turbine power plant located in the Punjab province in Pakistan. The contract spans over 12 years and was won via international bidding. This is the largest O&M contract for a single power plant and will be a new benchmark for Remaco in bidding for future contracts. Remaco’s other O&M contracts in Pakistan are for the Liberty Power plant, Narrowal power plant and New Bong Escape Hydro power plant. The award comes shortly after Remaco’s recent announcement to expand and setup its 1st overseas base in India..

Impact. The Balloki contract is estimated to contribute an average RM64m/annum to Tenaga’s topline (circa 0.1% of revenues). Although small, O&M is earmarked as one of the key units for overseas expansion riding on Tenaga’s aspiration to see 20% of earnings contributed from overseas within the next 8 years. Overall, Remaco is estimated to contribute RM1b, or 2% to group revenue (and 1% to group earnings), but this is targeted to almost double by 2020 to RM1.9b revenue/annum. While geographical expansion (especially Pakistan) is a key driver for Remaco, we also do not rule out expansion in non-power sectors. Currently, power sector clients contribute 90% of Remaco’s earnings with just 10% coming from the non-power sector i.e. O&G.

Recommendation. Re-affirm BUY on Tenaga at unchanged TP of RM16.80/share. Key catalysts: (1) Higher dividend catalyst on the back of an under-geared balance sheet and capital optimisation exercise (2) Overseas expansion provides scope for stronger growth in the mid-term (3) Strong earnings visibility post-ICPT implementation (4) At just 11.7x FY18F PE Tenaga trades at a discount to sector average of 13x and the index’s 16x-17x. Tenaga is a liquid proxy to the GDP growth outperformance and stronger trade, but share price has yet to move meaningfully relative to the broader market.

Source: MIDF Research - 9 May 2017