Tenaga Nasional Bhd
(May 11, RM13.80)
Maintain add with unchanged target price of RM18.42: Media reported on Saturday that TNB has taken over the mandate to build the 2,000mw coal-fired power plant Track 3B from 1Malaysia Development Bhd (1MDB).

The news report cited sources from the consortium that won the engineering, procurement and construction contract for the project. The report also highlighted that TNB will set aside around RM500 million in equity to start the project which is estimated to cost RM11 billion.

1MDB currently owns a 70% stake in Track 3B, while the other 30% is owned by Mitsui Co Ltd. 1MDB won the project in March 2014 through an open tender, beating bidders such as YTL Power International Bhd and TNB.

The news was a surprise although we believe there may be some truth to it. Assuming the news is true, we believe that it will be neutral for TNB in the longer term.

If TNB were to undertake Track 3B, we think that it would be given the opportunity to revise the terms of the agreement as the original bid’s tariff suited 1MDB’s cost of capital, which we estimate implies an internal rate of return of 6%.

We think this news may seem negative to the public, given the association with debt-laden 1MDB and the impression that it is another bailout. However, we believe TNB will benefit in the long run if it takes on Track 3B under revised terms.

The construction of the power plant has been delayed due to issues with 1MDB’s funding. If this is prolonged, the power plant may not meet its targeted commercial operation date, which would have a negative impact on the nation’s electricity grid and cause problems for TNB in the future.

We think that if TNB does participate in Track 3B, it would be given the opportunity to revise the terms of the agreement in order to ensure a fair return on the capital costs and risks that it would undertake. — CIMB Research, May 11

This article first appeared in The Edge Financial Daily, on May 12, 2015.