Tenaga Nasional Bhd
(June 2, RM13.38)
Maintain buy with a target price of RM16: Notwithstanding the weak broader market, TNB’s share price dipped 7% in May on news of TNB potentially taking over 1Malaysia Development Bhd (1MDB)’s power generation assets. 

If the rumours are true, the deal will be deemed a related-party transaction due to common shareholding (Ministry of Finance), which means the transaction would require minority shareholders’ approval. It is likely to be an arm’s length transaction with strict regulatory compliance to safeguard shareholders’ interest.

1MDB have paid about RM12 billion for its power assets over the past three years, of which RM3.3 billion is goodwill, suggesting RM8.8 billion net tangible asset value. 

The final pricing will be key to TNB’s decision to buy the relatively mature portfolio of power plants with 5,548mw net capacity (55% in Malaysia). This will increase TNB’s power generation capacity (8,636mw capacity, excluding Kapar Energy Ventures) significantly. Nevertheless, we do not discount potentially higher prices for the local assets as the Power Purchase Agreements may be extended (similar to the 10-year extension for Kuala Langat Power Plant).

We remain upbeat on the prospects of TNB given strong earnings visibility with the implementation of the cost-pass-through mechanism as well as robust outlook for electricity demand. 

A larger mix of coal-fired generation, coupled with TNB’s own capacity expansion plan, will continue to underpin near-term earnings. 

TNB is currently trading at undemanding valuation of 11 times financial year 2016 price-earnings ratio, compared with its closest peer Malakoff’s estimated 16 times. — AllianceDBS Research, June 2

This article first appeared in The Edge Financial Daily, on June 3, 2015.