This article first appeared in The Edge Financial Daily, on November 25, 2015.
KUALA LUMPUR: Tenaga Nasional Bhd’s (TNB) failed bid for 1Malaysia Development Bhd’s (IMDB) power assets has put an end to concerns over a bailout of the controversial strategic investment fund, which had racked up debts of RM42 billion since 2009, said analysts.
Investors appeared to have responded favourably to the news, given TNB’s share price spike of 5.5% or 74 sen to RM14.16 yesterday.
The stock slid as much as 11% between July 16 and Aug 10 (prior to the shock yuan devaluation on Aug 11), after it announced that it intended to purchase the controversial state-owned strategic investment fund’s power assets.
TNB’s counter had also spiked 56 sen or 4.43% when The Edge Financial Daily reported on Nov 5, quoting a source, that TNB had put in the lowest bid for the assets at slightly above RM8 billion — about 20% lower than the closest competing bid.
TNB’s counter, the eighth top gainer across the bourse yesterday, settled at RM13.58, up 16 sen or 1.2%, valuing it at RM77.77 billion.
1MDB announced on Monday that all its power assets, which are housed under Edra Global Energy Bhd, would be sold to China General Nuclear Power Corp (CGN) for an equity value of RM9.83 billion cash, under which CGN would also assume all the relevant gross debt and cash of Edra’s assets, based on the valuation date as at March 31, 2015. Besides TNB and CGN, Qatar’s Nebras Power QSC had also competed for 1MDB’s power assets.
“TNB looks certain to win back investors’ confidence with the completion of the bidding exercise for 1MDB’s power assets. The market should perceive this news favourably as TNB will no longer be seen as bailing out the state fund,” said CIMB Research analyst Saw Xiao Jun in a note yesterday.
“This could even boost investors’ confidence in the overall stock market as it epitomises the strong corporate governance standards of listed companies in Malaysia,” Saw, who has maintained an “add” rating on TNB, added.
Kenanga Research analyst Teh Kian Yeong said 1MDB’s asset sale deal with CGN is expected to remove an “overhanging” issue as the market was concerned over the possibility of TNB (fundamental: 1.3; valuation: 1.2) getting and overpaying for the assets.
“[This] could trigger a rerating to the pre-selldown level of 14 times to 15 times price-earnings ratio. Its share price has been under pressure since the takeover of greenfield Project 3B,” Teh said in a note to clients.
TNB took over 70% of Jimah East Power Sdn Bhd, a special purpose vehicle set up by 1MDB with Mitsui & Co Ltd (30%) to develop a 2,000mw coal-fired power plant in Jimah, Negeri Sembilan (also known as Project 3B) for RM46.98 million in June.
Teh, who upgraded TNB’s rating to “outperform” from “market perform”, also noted that operationally, the change in ownership of the assets would not affect TNB as an energy off-taker as all capacity payments from the power plants were backed by power purchase agreements.
Saw also noted that losing the bid would not impact TNB’s earnings in the near term, but said CGN may, in the long run, compete with TNB in future tender exercises for independent power producers’ power plants.
“CGN is poised to be a formidable opponent due to its gigantic scale. It had more than 260 billion yuan (RM172.5 billion) in assets as at September 2012, according to its website,” noted Saw.
Saw also noted that TNB’s unsuccessful attempt to buy 1MDB’s assets also raised the urgency for it to optimise its capital, as it is now under-leveraged. “A significant optimisation effort could provide the next rerating catalyst for the stock,” Saw said.