Tenaga Nasional Bhd
(July 16, RM12.36) 
Maintain add with an unchanged target price (TP) of RM15.27: TNB and several local and foreign companies have separately submitted non-binding offers to acquire 1Malaysia Development Bhd’s (1MDB) power assets.

Crucial information, such as the proposed acquisition price and earnings impact, was not disclosed. However, TNB believes that 1MDB’s assets are strong fits for its growth strategy, and stressed that any transaction needs to be value accretive. 

We believe the proposed acquisition, if it proceeds, will likely be neutral to slightly negative to TNB’s valuation in the near term. The acquisition could be negative because 1MDB acquired its power assets for RM18 billion (includes RM6 billion inherited debt) but has since written down about RM1.18 billion of acquisition-related goodwill. 

The transaction could be perceived negatively if TNB’s bidding price implies an enterprise value of more than RM16.82 billion. We think it will have a neutral impact if TNB pays a fair price for the assets. 

However, the transaction is unlikely to be significantly positive because the chances of TNB buying the assets at a significant discount to their fair values are slim as other parties are also bidding for the assets. 

Nonetheless, an acquisition should be positive for TNB in the long run as the exit of 1MDB from the Malaysian power sector will reduce the competition for future power plant projects. 

Maintain “add”. We believe the risk of an unfavourable transaction is partially mitigated by the minority shareholders’ approval requirement. Also, even with the assumption that TNB will acquire the assets with RM18 billion of borrowings, it will still need to raise its borrowing level and increase its dividend payout to optimise its capital structure. We believe a higher dividend payout is still possible and may rerate the stock. — CIMB Research, July 16

This article first appeared in The Edge Financial Daily, on July 20, 2015.