We raise our TP for TNB by 11% to MYR18.20 (36% upside) to factor in TNB’s reduced risk premium. The uncertainty surrounding a potential sizeable new acquisition by TNB is now removed, following 1MDB’s sale of its power assets to a Chinese party. We maintain our earnings forecast and BUY call. A good proxy to the economy, TNB also offers earnings defensiveness, large market cap and high share liquidity.

1MDB’s power assets go to CGN. 1Malaysia Development Bhd (1MDB) announced yesterday that its power division Edra Global Energy Bhd (Edra) had agreed to sell all its power assets to China General Nuclear Power Corporation (CGN) for an equity value of MYR9.83bn. Edra’s key power assets are five domestic and eight international power plants with a total effective capacity of 5,594 megawatts (MW).

Lower risk premium for TNB. We believe the latest event has resulted in a lower premium for TNB as the uncertainty surrounding a potential sizeable new acquisition by TNB is now effectively removed.

Forecasts. We maintain our earnings forecasts.

Risks. These include: i) Regulatory risks including its inability to automatically pass on higher fuel costs via tariff hikes, ii) Unscheduled outages from power plants, iii) interruptions in fuel supply, and iv) delays in the completion of greenfield power plant projects.

Maintain BUY. A good proxy to the economy, the national utilities company also appeals to investors due to its earnings defensiveness, large market value and high share liquidity. We also advocate owning TNB for its ability to gradually regain its lost ground in the more lucrative power generation business (see Figure 1). We raise our TP by 11% to MYR18.20 (from MYR16.37) based on 14x FY16F EPS (from 12.6x). We believe a 10% discount to the 5-year historical average P/E of 14x is no longer necessary following the latest turn of events. Our DCF model also produces a corroborative valuation of MYR18.20, based on a discount rate that is equivalent to TNB’s WACC of 7.4% and a terminal growth rate assumption of 1.5%. At the current price, the stock trades at a highly attractive 10.3x FY16F P/E and a 26% discount to its NPV bsed on DCF of MYR18.20.

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Source: RHB Research - 24 Nov 2015