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

Tenaga Nasional Bhd 
(Oct 19, RM12.80)
Maintain buy with an unchanged fair value of RM16.70 per share: Last Friday, Tenaga Nasional Bhd (TNB) announced that it had submitted a conditional offer to acquire Edra Global Energy Bhd’s power assets from 1Malaysia Development Bhd (1MDB).

TNB did not provide an indicative price in its announcement.

As Malaysia’s largest power producer, TNB said it is the “best and most logical buyer”. It added that the assets will be a strong fit for its growth strategy and will further enhance its earnings and cash flow.

Nevertheless, TNB emphasises that the offer will be dependent upon the conditions being met, and there is no assurance that any transaction will be concluded.

The announcement is not a surprise as TNB submitted an indicative non-binding proposal in July. TNB is one of three which made offers to 1MDB. According to reports, the two other bidders could be Qatar’s Nebras Power QSC and Saudi Arabia’s Aljomaih Group.

Given the lack of details, we are neutral on the news and make no changes to our numbers. 

Notably, TNB earlier indicated that it does not intend to pay a premium for the assets. Reports indicate that Edra’s book value ranges from RM15 billion to RM20 billion, while TNB is believed to have valued Edra at approximately RM13 billion. 

Note that 1MDB is estimated to have paid about RM12 billion to acquire the assets from 2012 to 2014, and inherited debts of RM6 billion.

Assuming a price tag of RM18 billion and an 80:20 debt-to-equity ratio, our back-of-envelope calculations show that TNB’s net gearing will rise from 0.4 times to 0.7 times as at end-financial year 2015.

Nevertheless, we take comfort from TNB’s recent purchase of Edra’s 70% stake in Jimah East for RM47 million — a discount to 1MDB’s reported incurred project development cost of RM84 million.

Also, this latest acquisition will require scrutiny from an independent adviser and green light from TNB’s non-interested shareholders.

Pending further developments, we maintain our numbers and fair value. — AmResearch, Oct 19