THERE could be material changes to the asset base of Edra Global Energy Bhd (formerly known as 1MDB Energy Group Bhd) that could affect the initially estimated value of the company and the timing of its planned initial public offering (IPO), sources say.

It is understood that at press time, the promoters were talking about, among others, the exclusion of the RM11 billion Project Track 3B, a new coal-fired power plant to be built with a capacity of 2 x 1,000mw, from Edra’s IPO.

Project 3B is slated to be built in Jimah, Negeri Sembilan, adjoining Edra’s 75%-owned facility, Jimah Energy Ventures Sdn Bhd, and to be commissioned on a staggered basis starting Nov 15, 2018, and May 15, 2019, when a second part, known as Unit 2, will start.

“There are murmurs [of the material changes] but they (Edra) have not made anything official as yet. They (Edra) have not made any formal application for an extension of time,” a source familiar with the matter says.

He explains that there is no reason to include Project 3B in Edra now when it will only start generating income from 2018. “Might as well inject it then — in 2018. Why bother including it now?”

Other than the possible exclusion of Project 3B, it is also understood that Edra is in talks to acquire new power assets, which could also alter the original estimation of its IPO valuation.

The new assets sought by Edra are understood to be located in Indonesia and India. It is also learnt that there are other opportunities for the group in Egypt.  

“These are revenue-generating assets that Edra is eyeing, which could help beef up its IPO,” the source says.

Powertek Energy Sdn Bhd (formerly known as Tanjung Energy Holdings Sdn Bhd), a unit of Edra, has assets here, Egypt, Pakistan, Bangladesh, Sri Lanka and the United Arab Emirates. It is worth noting that in Egypt and Bangladesh, Powertek Energy is the largest independent power producer.

“Basically, there are so many new things happening, so there could be many material changes at the IPO level — changes that could alter valuations drastically, so it (the IPO) could be nudged back later,” says the source.

It is understood that while the promoters had earlier set the indicative price for Edra’s IPO at RM1.83 per share, which would put the entity’s market capitalisation at about RM11 billion, a new price as high as RM2.17 is now being considered to factor in the changes in the asset base.

According to documents viewed by The Edge, the original plan was that Edra’s parent, 1Malaysia Development Bhd (1MDB), would offer for sale 1.1 billion shares in the energy outfit at RM1.83 apiece, which would garner the sovereign wealth fund some RM2 billion. Meanwhile, Edra itself would issue in excess of three billion new shares, raising close to RM5.5 billion for the company.  

In total, some 4.81 billion shares were expected to be sold in the IPO, which at RM1.83 apiece, works out to RM8.81 billion.

Initial indications were that 1MDB would retain only 20% of Edra with the bulk of the funds it obtained from the IPO to be used to repay its borrowings.

Funded mostly with borrowings, 1MDB had forked out as much as RM12 billion to acquire power assets from tycoon T Ananda Krishnan (RM8.5 billion), the Genting group (RM2.3 billion) and the Negeri Sembilan royal family (RM1.2 billion).

Based on the price paid relative to the expected returns on the assets, market watchers are of the opinion that 1MDB had overpaid for them.         

At the original indicative price of RM1.83 each or a market capitalisation of about RM11 billion, Edra is slated to trade at a price-earnings multiple of 20 times FY2016 earnings, which is considerably pricier than the current industry range of 9 to 15 times.

At the same valuation, shareholders of Edra are likely to get yields of only between 2.5% and 3.5%, which are way below those of its peers, such as YTL Power International Bhd, which has a gross indicated yield of almost 6.6%.

If the status quo is maintained, Edra could have difficulty in attracting investors. It would seem even less attractive at a higher IPO price unless it has new assets generating good cash flow.   

Already, Edra is trying to woo investors by changing its name from 1MDB Energy Group Bhd as part of a rebranding strategy to distance itself from its parent 1MDB, which has attracted much public scrutiny.

It is worth noting that 1MDB has come under fire from the opposition and even former prime minister Tun Dr Mahathir Mohamad over its high debt level and poor financial performance.

In its financial year ended March 31, 2014, 1MDB suffered an after-tax loss of RM665.36 million on revenue of RM4.26 billion. The bleeding would have been more substantial had it not been for a revaluation gain of RM896.8 million from its property assets, without which 1MDB would have posted a loss of RM1.56 billion.

According to the company’s 2014 annual report, its long-term borrowings stood at RM33.54 billion, up RM7.18 billion or 27% from FY2013.  

The RM7.18 billion debt consists of RM4.27 billion of Islamic medium-term notes, which have coupon rates of between 7.25% and 9.85%, a junior Islamic debt of RM1.02 billion with an interest rate of 18.06%, a RM920 million sukuk murabahah for 1MDB’s Bandar Malaysia project with rates of 5.85% to 6.05%, and a term loan of RM600 million at 8.85% interest for the Jimah Energy venture.

These high interest charges resulted in much of the financial woes at 1MDB.

As at end-March this year, 1MDB had cash and bank balances of RM3.84 billion, down 42% from FY2013. The dip in its cash pile could have been the result of paying the high interest charges and borrowings.

However, 1MDB’s annual report also shows that the sovereign wealth fund received RM437.55 million in dividend income from “available for sale investments”.

The dividends were likely to be from the RM7.71 billion invested in a segregated portfolio company registered in the Cayman Islands and the additional RM5.18 billion from other fund investments, which work out to a total of RM12.89 billion.

1MDB’s investments in financial products parked under “available for sale investments” in the annual report amounted to RM13.39 billion.

This article first appeared in The Edge Malaysia Weekly, on December 8 - 14, 2014.

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