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This article first appeared in The Edge Malaysia Weekly, on December 28, 2015 - January 3, 2016.

 

NEWSFLOW on Tenaga Nasional Bhd has been active in recent months. Following hard on the heels of losing its bid to buy 1Malaysia Development Bhd’s power assets and a dispute with the Inland Revenue Board over RM2.1 billion worth of taxes, TNB announced that it was buying a 30% stake in Turkey-based GAMA Enerji AS for US$243 million (RM1.04 billion).

However, the investment did not come as a big surprise, given the group’s five-year roadmap to expand generation capacity overseas.

It also gives TNB a chance to break away from a crowded local power sector that has seen a compression of internal rates of return to low single digits. Overseas ventures will enable TNB to grow its earnings, leveraging its strong balance sheet.

But certain quarters are not so optimistic, considering the experiences of others. Its venture in India was supposed to have been a game-changer for Mudajaya Holdings Bhd but things did not pan out as expected. An inadequate supply of coal alone has delayed the project by years.

Other examples are JAKS Resources Bhd in Vietnam and Mega First Bhd in Cambodia, although YTL Power International Bhd has had better luck abroad.

It is worth noting that in Khazanah Nasional Bhd’s stable of companies, TNB is a little behind the curve when it comes to venturing abroad. The government investment fund’s 37.2%-controlled Axiata Group Bhd recently acquired an 80% stake in Nepal’s NCell Pte Ltd, giving it a presence in seven countries. Its other subsidiaries that have an overseas reach are Malaysia Airports Holdings Bhd (MAHB), CIMB Group Holdings Bhd and IHH Healthcare Bhd.

Venturing abroad, however, has its risks and not all the projects have been success stories. CIMB’s venture in Indonesia, for example, was hit by a slowdown in the republic’s coal mining sector.

TNB may be financially successful in Malaysia, where it controls a structural monopoly on the transmission and distribution of electricity as well as the lion’s share of the generation market but competing in a foreign environment is a different ball game.

One advantage for TNB in Turkey could be that its sister companies — MAHB and IHH — already have a presence there. To some extent, this will help the utility company in terms of local knowledge and regulatory issues.

MAHB, in which Khazanah owns 36.65%, owns Istanbul’s Sabiha Gokcen International Airport while IHH has a 60% stake in Achibadem Healthcare Group that’s worth US$1.1 billion.

Turkey’s energy sector offers much potential for growth with demand for electricity growing at about 6% a year, driven by a population of 75 million. By comparison, energy demand in Malaysia saw a compound annual growth rate of 5.3% from 2003 to 2013 and is expected to decelerate as GDP growth slows.

Furthermore, the projects in Turkey are much bigger in size. The country has an installed capacity of about 69,700mw, which is expected to grow to 100,000mw by 2020, compared with Malaysia’s under 25,000mw. On top of that, it is in the midst of restructuring its power sector, decreasing the state’s share of power generation. In 2014, the private sector had a more than 79% share of electricity generation compared with 57% in 2003.

Turkey, however, has some geopolitical risks on its doorstep — a civil war in neighbouring Syria, a conflict involving the Islamic State and escalating tensions with the Kurdistan Workers’ Party.

In this scenario, what TNB has some control over is the partner it has chosen — GAMA Holding AS. The construction and energy conglomerate will retain a controlling 50.5% stake in GAMA Enerji while 14.5% will be held by the World Bank’s International Finance Corporation and 5% by Dutch cooperative IFC Global Infrastructure Fund Holding I Coöperatief UA.

While the partners seem impressive, GAMA Enerji itself is small. TNB’s acquisition values it at US$810 million and according to the company’s website, it has an effective installed capacity (adjusting for equity) for only 1,214.5mw and 100 million cubic metres of water.

In Turkey, the group has an effective installed capacity of 243mw with another 1,061mw under construction or in development. This is because the bulk of GAMA Enerji’s installed capacity comprises renewable energy — wind and hydroelectric.

The GAMA group is not that big either, at least compared with TNB. As at December 2014, its total assets were valued at 2.34 billion lira (RM3.42 billion), dwarfed by TNB’s total assets worth RM18.8 billion.

GAMA Holding’s revenue in FY2014 was TRY1.8 billion (RM2.62 billion), of which 81% came from engineering, procurement and construction contracts. Only 6% or RM108 million of the group’s revenue came from its energy arm.

TNB’s 30% share of revenue would only be RM30 million — not quite enough to justify the acquisition’s RM1.04 billion price tag. Of course, these are historical earnings and TNB valued the acquisition on discounted cash flow. With several 49-year concessions for renewable energy, GAMA Enerji’s DCF value could be higher.

Nonetheless, TNB will have to generate a huge amount of value going forward to justify its huge investment. In a nutshell, the national utility company only has a toehold in Turkey and will have to put more effort into growing its investment in Turkey.

TNB will have to throw its financial muscle behind the GAMA group and hope that its Turkish partner has strong local ties to secure more projects. In the meantime, the acquisition will increase TNB’s net gearing to 0.4 times from 0.36 times, assuming it is funded by 80% debt since GAMA Enerji’s liabilities will not be consolidated into TNB’s books.

Looking ahead, even if TNB were able to grow GAMA Enerji’s generation capacity, it will still have to keep a close eye on the lira, which has lost 20% against the US dollar this year and 2.75% against the ringgit. In fact, the lira had depreciated 27.15% over the past five years to 1.495 against the ringgit as at last Tuesday.

In short, TNB had better be prepared for a stern test abroad.

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