AmWatch - Tenaga Nasional : Taking over 1MDB’s Project 3B for RM47mil BUY, 6 Jul 2015

STOCK FOCUS OF THE DAY

Tenaga Nasional : Taking over 1MDB’s Project 3B for RM47mil    BUY

We maintain our BUY call on Tenaga Nasional Bhd with an unchanged DCF-derived fair value of RM16.40/share. Last Friday, Tenaga announced that it has accepted the Energy Commission’s (EC) addendum (dated 29 June 2015) to the Letter of Award for the 2x1,000MW coal-fired power plant at Jimah (Project 3B) dated 3 June 2014. The addendum followed the EC’s earlier Request for Proposal on 19 June 2015.

In tandem with this, Tenaga also said that it has entered into a Share Sale and Purchase Agreement (SSPA) with 1Malaysia Development Bhd (now known as Edra Global Energy) for the latter’s 70% stake in Jimah East Power Sdn Bhd (JEP) for a total consideration of RM46.98mil. The remaining 30% shareholding in JEP will continue to be held by Mitsui & Co. Ltd. The purchase consideration, which will be paid using Tenaga’s internally generated funds, appears to be fair. According to the group, the actual project development cost incurred by 1MDB is RM83.68mil as at 17 April 2015. This announcement should partially remove the overhang on Tenaga’s share price. The stock had been under heavy selling pressure following concerns that it will be overpaying for the 70% stake.

We opine that Tenaga’s assumption of control of Project 3B will be mildly positive for the group as any savings from the IPP payments to 1MDB will be partially offset by costs of operating the plant. Note that Tenaga had obtained a higher levelised tariff rate of 26.67 sen/kWh (vs. 25.33 sen/kWh, previously) for Project 3B, given the higher construction costs and forex rates. The project is estimated to cost RM11.7bil. Assuming an 80:20 debt to equity ratio, our back-of-envelope calculations show Tenaga’s net gearing rising from 0.4x to 0.6x. This is still palatable given the group’s strong and stable cash flows. We are keeping our FY15F-FY17F earnings estimates for now pending Tenaga’s upcoming 3QFY15 results announcement.

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