Question on Tenaga share sustainability amid 1MDB sentiment

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KUALA LUMPUR (June 19): As Tenaga Nasional Bhd shares rebounded, the perceived bail-out nature of the state-controlled utility's power plant buy from 1Malaysia Development Bhd (1MDB) may cap the former's share price rise, analysts said.

This was despite Tenaga's (fundamental: 1.3; valuation: 1.8) fundamentals were deemed intact. For now, analysts said the spotlight would be on how much Tenaga would pay for the 70% stake in 1MDB's 3B power plant project after the Malaysian Cabinet approved the transaction yesterday.

Today, MIDF Amanah Investment Bank Bhd analyst Izzat Esa wrote in a note the research firm believed that Tenaga would only proceed with the acquisition if the company was not asked to compensate 1MDB unfairly.

"We believe that the final outcome to this saga would ultimately hinge upon the amount of compensation needed to be paid to 1MDB. With the amount [being] currently undisclosed, we expect TNB to proceed with Project 3B only if the Company is not asked to compensate 1MDB unfairly.

“We opine that the company’s (Tenaga) share price could be put under tremendous pressure due to the negativity surrounding 1MDB as well as the perceived 'bail-out' nature of the transaction. We nonetheless, believe that the fundamental of the company remains intact and our earnings forecasts would remain unchanged," Izzat said.

Yesterday, investors sold down Tenaga shares after Energy, Green Technology and Water Minister Datuk Seri Maximus Ongkili said the Cabinet had given its nod for Tenaga's takeover of project 3B.

Tenaga then came up with a separate announcement, stating that it had not received any formal indication from the government. Tenaga shed 56 sen or 4% to close at RM12.60 to become the biggest decliner on the exchange.

Today, Tenaga shares rose 14 sen or 1% at 12.30pm to settle at RM12.74 for a market capitalisation of RM71.9 billion. The eighth-largest gainer on the exchange today had fallen 8% this year, underperforming the FBM KLCI's 2% decline.

Izzat said as Tenaga's fundamentals were deemed intact, the stock's decline could be a good opportunity to accumulate the shares. MIDF has retained its "buy" call for Tenaga shares with an unchanged target price (TP) of RM17.20

For comparison, TA Securities Holdings Bhd downgraded Tenaga to "hold" until more details on the 1MDB power plant deal were available. Tenaga's downgrade came with a lower TP of RM13.96.

TA Securities analyst James Ratnam attributed the knee jerk reaction in Tenaga's share price to the lack of clarity on the project’s purchase price.

“At this juncture, market mood appears to be deeply negative on any deal involving 1MDB. Moreover, the news today that 1MDB had also invited bid for its brownfield power plant is also likely to weigh on sentiment.

"We view a higher tariff is necessary to ensure the project is commercially viable to Tenaga," he said

The Edge Financial Daily, quoting sources, reported today the government had also granted a tariff rate hike of up to one sen per kWh for the  electricity produced by the 2,000MW coal-fired power plant, which would be located in Jimah, Negeri Sembilan.

The tariff hike was given after taking into account the weaker ringgit, borrowing costs and expenditure on additional infrastructure.

(Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)