Tenaga Nasional Bhd
(April 20, RM14.52)
Maintain buy with a higher target price of RM16.29: The Edge weekly reported that JAKS Resources Bhd is in negotiation with Tenaga Nasional Bhd (TNB) to be a partner in the former’s 2x600MW coal-fired power plant in Hai Duong, Vietnam. According to the report, TNB is being offered a 70% stake in the project, which is estimated to cost US$2.25 billion (RM8.12 billion).

To recap, the concession was awarded to JAKS in 2011. The group partnered Wuhan Kaidi Electric Power Engineering Co Ltd to undertake the project, but the venture fell through. Since then, the project has been delayed. Based on an announcement dated Oct 28, 2014, the Vietnamese authorities extended the period to fulfil conditions precedent to Oct 31, 2015. The plant is scheduled to be commissioned in 2018.

The article gave some details of the project which include the concession period of 25 years, attractive project internal rate of return (IRR) of at least 15% as the power purchase agreement (PPA) is on take-or-pay basis, full cost pass a through for fuel and exchange rates. Besides, it has been reported that Vietnamese Electricity, the offtaker, is committed to take up all the electricity generated by the power plant or pay the generation cost and tariff in Vietnamese dong, with 30% paid at the beginning of the month and the balance at the end of the month.

Obviously, the partnership is mostly to capitalise on TNB’s balance sheet strength, and ensure that the project could achieve the financial close. On a broader perspective, TNB’s long-term plan includes growing its overseas power assets. At present, it owns a power plant in Pakistan. The key attraction is that the project’s PPA, based on the information highlighted above, is structured similar to PPAs in Malaysia. The take-or-pay clause is particularly attractive and could yield high returns, as YTL Power International Bhd’s Paka and Pasir Gudang power plants had demonstrated.

That said, we highlight that Vietnam’s sovereign risk is considerably higher compared with Malaysia, and the currency is much more volatile historically. The report suggests payment in US dollars, although another part claims tariff will be paid in dong. As at financial year 2014 ended Aug 31, 2014 (FY14), TNB’s net gearing stood at 0.4 times, although that figure could spike if the group takes over Jimah East or Project 4A.

A potential deal is still a long shot, in our view. Hence, we expect the news to be share price “neutral” in the short term.

We maintain TNB’s “buy” rating. The release of the second quarter of FY15 (2QFY15) results next week can be positive to share price as we expect a bumper profit on the back of higher utilisation of coal and hydro power plants. The key risk is the weaker ringgit will translate into a substantial translation loss on its US dollar borrowings. — TA Securities, April 20

This article first appeared in The Edge Financial Daily, on April 21, 2015.