INVESTMENT HIGHLIGHTS

• Issues RM3.7b Sukuk to finance Project 4A
• Set to improve Tenaga’s generation share

• Decent impact on earnings

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

Secures financing for Project 4A. Southern Power Generation (SPG) (51%-owned by Tenaga) has completed the issuance of a RM3.7b Sukuk Wakalah. The proceeds are meant to fund 80% of the total cost for Project 4A. To recap, Tenaga took a controlling 51% stake in Track 4A in May this year. Track 4A is expected to achieve commercial operation date in July 2020. The project is expected to cost RM4.7b.

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. At this rate however, TNB Prai was reported to have 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. While details are still scarce we would not rule out the possibility that the terms have been renegotiated.

Positives from the move. Tenaga’s participation in Track 4A 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% to an estimated 58% (3) Value accretion to Tenaga (4) Enhance reserve capacity, which is currently estimated to stand at ~30%.

Recommendation. Reaffirm our BUY call on Tenaga at unchanged TP of RM16.80/share. Assuming a high single digit IRR for Project 4A, we estimate a marginal <1% NPV/share enhancement to our DCF-based TP and a 3% enhancement to EBITDA. Assuming a RM4.7b project cost as reported, Tenaga’s net gearing will nudge up to 44% from the current 38%, but the project cost is likely to be spread over the next 2 years.

Source: MIDF Research - 1 Nov 2017