Tenaga  has made a takeover offer for a 77.9% stake in Integrax  it does not  aready  own,  for  MYR2.75/share  cash.  We  maintain  our  BUY  call, earnings  forecasts  and  TP  of  MYR15.50  (9.5%  upside).  We  deem  thisdeal  too small to leave  any  impact on Tenaga’s P&L and balance sheet. Tenaga, a heavy fuel user,  has emerged a clear winner from the current oil price rout. We also like its “renaissance” in power generation.

Takeover offer for Integrax at MYR2.75/share.  Tenaga Nasional Bhd (Tenaga) which already owns 66.5m shares or a 22.1% stake in Integrax Bhd  (Integrax)  (INTEG  MK,  NEUTRAL,  TP:  MYR2.28),  has  made  a takeover  offer  for  the  remaining  234.3m  shares  or  77.9%  stake  in Integrax  it  does  not  already  own  for  MYR644.2m  or  MYR2.75/sha recash.  

Slight premium valuation, but not excessive.  At MYR2.75/share, the offer values Integrax at: i) a 21% premium to our MYR2.28 DCF -derived TP for Integrax based on a discount rate of 10.5%,  ii)  14.5x our FY15 net profit forecast for Integrax, and iii) 1.32x its book value of MYR2.09 as at 30 Sep 2014.

A tactical move. We believe the deal is too small to have any impact on Tenaga’s P&L and balance sheet.  Tenaga’s  latest move is more tactical in nature  as it  will give it  full control over the port’s operations and future direction. In addition,the takeover  makes perfect sense  administratively, particularly when it comes to negotiation of jetty usage rates which has in the past been a sticky point and a long-drawn process. 

Forecasts. We maintain our forecasts. 

Risks.  These  include:  i)  volatility  in  gas  and  coal prices,  ii)  volatility  in MYR’s strength against the USD, and iii) regulatory risks.

Maintain BUY. Tenaga  has emerged a clear winner from the current oil price  rout.  As  the  proposed  half-yearly  adjustment  in  electricity  tariff  isstill  far  from  being  a  certainty,  Tenaga  effectively  will  still  have  to stomach substantial fuel cost risks. Nonetheless, the current low energy price  environment  is  surely  a  respite.  We  keep  our  TP  at  MYR15.50 based  on 15.4x  FY15F EPS,  at a 10% premium over Tenaga’s 5-year historical  average  of  14x,  to  reflect  an  improved  regulatory  risk environment.

Making a Takeover Offer For Integrax

Takeover offer for Integrax at MYR2.75/share. Tenaga, which already owns 66.5m shares  or  a  22.1%  stake in  Integrax,  has  made  a  takeover  offer  for  the  remaining 234.3m shares or 77.9% stake in Integrax it does not already own for MYR644.2m or MYR2.75/share  cash.  Integrax  is  the  operator  of  Lumut  Port  on  the  west  coast  of Peninsular  Malaysia.  At  present,  Tenaga  is  the  sole  customer  of  Integrax,  which handles Tenaga’s imports of coal used in power generation.

Slight premium valuation, but not excessive.  At MYR2.75/share, the offer values Integrax at a 21% premium to our MYR2.28 DCF-derived TP for Integrax based on a discount  rate  of  10.5%.  Based  on  our  FY15  net  profit  forecast  for  Integrax  of MYR58.6m  or  19  sen/share,  the  offer  values  Integrax  at  14.5x  1-year  forward earnings,  at  a  premium  to our  implied  12x  1-year  forward  P/E  based on our  DCFderived  TP  for  Integrax.  Also,  the  offer  prices  Integrax  at  1.32x  its  book  value  of 
MYR2.09 as at 30 Sep 2014.

Deal too small to  leave any  impact  on  Tenaga.  Assuming a successful takeover bid,  we believe  the MYR664.2m consideration will  likely  have  a  marginal impact on Tenaga’s  net  debt  and  gearing,  only  lifting  them  slightly  to  MYR 18.0bn  and  0.42x respectively  from MYR17.3bn and 0.40x as at 31 Aug 2014 . Similarly, assuming the consideration is to be fully debt-funded at an interest cost of 5%, we estimate that the exercise will likely enhance Tenaga’s FY16 (Aug) net profit by about MYR20m,  which is a drop in the ocean compared with our FY16 net profit forecast of MYR5.8bn.  

A  tactical  move.  We  believe  Tenaga’s  latest  move  is  more  tactical  in  nature.  A successful takeover of Integrax will give Tenaga full control over the port’s operations and future direction. After all,  Tenaga  is the sole customer of the port. In addition,  it makes perfect sense administratively to turn Integrax into a wholly-owned subsidiary, particularly  when it comes to negotiation of jetty usage rates which has in the past been a sticky point and a long-drawn process.
Forecasts. We maintain our forecasts.

Risks. These include: i) volatility in gas and coal prices, ii) volatility in MYR’s strengthagainst the USD, and iii) regulatory risks.

Maintain BUY. Tenaga has emerged a clear winner from the current oil price rout. As the half-yearly adjustment in electricity tariff in accordance with the Fuel Cost Pass Through (FCPT) mechanism as stipulated in the new energy policy effective 1 Jan 2014, is still far from being a reality (given that the much anticipated tariff hike on 1 Jul 2014 failed to materialise), Tenaga effectively will still have to stomach substantial fuel  cost  risks.  Nonetheless,  the  current  low  energy  price  environment  is  surely  a respite for Tenaga.

For every USD5/tonne change in our average coal cost assumption of USD75/tonne, our  FY15  net  profit  forecast  could  deviate  by  3.9%.  Similarly,  for  every  MYR1  per million  British  thermal  unit  (mmBtu)  change  in  our  average  unsubsidised  gas  cost assumption of MYR46/mmBtu, our FY15 net profit forecast could vary by 2.0% (see Figure 1 for our sensitivity analysis on coal and gas costs).

Also,  Tenaga  is  regaining  lost  ground  in  the  more  lucrative  power  generation business  vis-à-vis  transmission  and  distribution,  having  emerged  as  the  biggest winner of new power plant projects in Malaysia in recent years (see Figure 2).

We  keep our  TP at  MYR15.50 based on 15.4x FY15F EPS,  at a 10% premium over Tenaga’s  5-year  historical  average  of  14x,  to  reflect  an  improved  regulatory  risk environment  with  the  proposed  FCPT  mechanism  as  stipulated  in  the  new  energy policy effective  1  Jan 2014. While the implementation may face hurdles, we  believe this is certainly a step in the right direction towards an eventual tariff deregulation in Malaysia.

Source: RHB