TENAGA (5347) - Tenaga Nasional - Tenaga to take on Track 3B?
Target RM18.42 (Stock Rating: ADD)
The Edge Weekly reported that Tenaga and the Energy Commission (EC) are in informal discussions for the former to take over the 2,000MW coal-fired Track 3B power plant from troubled 1MDB. Either way, we think that it will not have a significant impact on Tenaga's earnings. We, thus, maintain our Add call on the stock and our target price of RM18.42 based on 15x FY16 P/E.
What Happened
The Edge Weekly reported that 1MDB could fail to raise the necessary funding it requires to finance the 2,000MW coal-fired power plant in Jimah, dubbed Track 3B. The article, quoting unnamed sources, highlighted that any further delay in the construction of the power plant, which was supposed to come onstream in Nov 2018, could lead to power outages in the Peninsular electricity grid. The article also quoted sources as saying that the EC is in discussions with Tenaga for the latter to take over the project through a 70% stake, with the balance owned by Japan's Mitsui & Co. 1MDB has until mid-April to secure the RM8.4bn in financing to fund the construction of Track 3B, failing which the EC may look for other players to develop the project.
What We Think
It is widely known that 1MDB is currently facing financial issues thus it is possible that Track 3B will not be developed based on the expected schedule. Such a turn of events could see Tenaga undertake the project, considering how important it is for the national grid. However, we believe that it is unlikely Tenaga will have to bear the costs associated with the delay, which was caused by 1MDB. The amount Tenaga will have to pay for the licence is speculated to be c.RM300m or less due to the various delays, resulting in penalties. The development cost for the project is expected to be c.RM6bn-7bn (for Tenaga's 70% stake). Note that in terms of earnings, Track 3B will likely not have any major impact on Tenaga's earnings as what it saves in IPP costs (from buying the electricity from 1MDB) is offset by the plants’ depreciation and operation and maintenance costs. We estimate that the overall earnings impact would likely be less than 2% for Tenaga.
What You Should Do
We believe Tenaga could be asked to take on Track 3B and that it will likely be at terms that are not detrimental to the company. We maintain our Add call on Tenaga, with an unchanged target price of RM18.42. We believe that this development will not shake investor sentiment on the stock.
Source: CIMB Daybreak - 09 February 2015
Target RM18.42 (Stock Rating: ADD)
The Edge Weekly reported that Tenaga and the Energy Commission (EC) are in informal discussions for the former to take over the 2,000MW coal-fired Track 3B power plant from troubled 1MDB. Either way, we think that it will not have a significant impact on Tenaga's earnings. We, thus, maintain our Add call on the stock and our target price of RM18.42 based on 15x FY16 P/E.
What Happened
The Edge Weekly reported that 1MDB could fail to raise the necessary funding it requires to finance the 2,000MW coal-fired power plant in Jimah, dubbed Track 3B. The article, quoting unnamed sources, highlighted that any further delay in the construction of the power plant, which was supposed to come onstream in Nov 2018, could lead to power outages in the Peninsular electricity grid. The article also quoted sources as saying that the EC is in discussions with Tenaga for the latter to take over the project through a 70% stake, with the balance owned by Japan's Mitsui & Co. 1MDB has until mid-April to secure the RM8.4bn in financing to fund the construction of Track 3B, failing which the EC may look for other players to develop the project.
What We Think
It is widely known that 1MDB is currently facing financial issues thus it is possible that Track 3B will not be developed based on the expected schedule. Such a turn of events could see Tenaga undertake the project, considering how important it is for the national grid. However, we believe that it is unlikely Tenaga will have to bear the costs associated with the delay, which was caused by 1MDB. The amount Tenaga will have to pay for the licence is speculated to be c.RM300m or less due to the various delays, resulting in penalties. The development cost for the project is expected to be c.RM6bn-7bn (for Tenaga's 70% stake). Note that in terms of earnings, Track 3B will likely not have any major impact on Tenaga's earnings as what it saves in IPP costs (from buying the electricity from 1MDB) is offset by the plants’ depreciation and operation and maintenance costs. We estimate that the overall earnings impact would likely be less than 2% for Tenaga.
What You Should Do
We believe Tenaga could be asked to take on Track 3B and that it will likely be at terms that are not detrimental to the company. We maintain our Add call on Tenaga, with an unchanged target price of RM18.42. We believe that this development will not shake investor sentiment on the stock.
Source: CIMB Daybreak - 09 February 2015
