• Expands into wind farms in UK
• Not exactly cheap on per MW basis but backed by guaranteed export tariff
• We estimate marginal impact to earnings
• Maintain NEUTRAL at unchanged TP at RM16.30

Expands renewable energy Tenaga acquired an 80% stake in two UK renewable energy (RE) companies for cash consideration of GBP77.4m (RM418.7m). The two companies i.e. GVO Wind Ltd and Bluemerang Vapital Ltd own the largest FiT (Feed-in-Tariff) wind portfolio in the UK comprising 53 operational onshore medium wind turbines with a combined capacity of 26.1MW. Management of the portfolio will be outsourced to Longspur Capital Ltd, which is manned by experienced personnel from the former managers of the acquired assets.

Immediate earnings accretive. No details on financials have been released yet, but Tenaga indicated that the portfolio offers “attractive” returns and are earnings accretive from year one. The acquisition of the wind farms complement Tenaga’s RE assets (via 50% stake in Vortex Solar) which comprise of 365MW of solar RE portfolio in the UK. Wind RE generally generates more revenue in winter while solar RE generates the most revenue in summer. The equity purchase consideration of GBP77.4m (RM418.7m) represents 80% equity value based on an agreed EV of GBP171.2m. The portfolio comprises of young assets with an average age of 2.5 years. The two acquisitions will add another 26MW, raising Tenaga’s total international RE portfolio to 280MW.

At a premium, but backed by FiT. Recently constructed (2013-2015) onshore wind farms in the UK entail cost of between GBP3.5m – 4.1m per MW. Tenaga’s purchase of the wind RE assets translates to GBP6.6m and looks on the high side. However, the majority of the portfolio is contracted through the UK Government backed FiT support mechanism and guaranteed export tariff over a period of 20 years. The average revenue for the portfolio is approximately GBP223/MWh.

Recommendation. Maintain NEUTRAL at unchanged DCF-derived TP of RM16.30. While dividend yields are still relatively attractive, Tenaga’s inflated earnings in RP1 is unlikely to be sustained in RP2. Furthermore, the stock has had a good run in the past 12 months and we suggest investors lock-in profits at this point.

Source: MIDF Research - 2 Mar 2018