Tenaga Nasional Bhd
(Nov 8, RM14.32)
Maintain buy with an unchanged target price of RM16.80: Tenaga Nasional Bhd (TNB) completed the acquisition of an Indian power company, GMR Energy Ltd (GEL) (the energy arm of GMR Infrastructure), for US$300 million (RM1.26 billion). Assets purchased under GEL were cherry-picked and included a total of 4,638mw of power assets (comprising 2,300mw of operating assets with the remainder under construction and development).

At an estimated EV of US$700,000 per mw, the acquisition compares favourably to Malaysian benchmarks of US$1 million to US$2 million per mw. TNB also highlighted the potential for both parties to develop an O&M partnership in the future.

India is facing a power supply deficit of 5%, which will grow to 11% by 2020. Electricity demand is growing at a pace of 6% per annum (compared with Malaysia’s 2% to 3%) and TNB intends to capitalise on the power supply deficit and India’s 7% to 8% gross domestic product growth.

We understand the assets purchased have remaining lives of nine to 40 years. After TNB’s acquisition, GMR Infrastructure still holds a controlling 52.14% stake in GMR Energy, while private equity investors including Temasek and IDFC hold 17.86%.

On top of this, TNB has the option within five years to invest in two more plants previously owned by GEL (GEL’s structure was revised prior to the acquisition to suit TNB’s asset picks) with total capacity of 2,138mw.

Financial details are still lacking, but we suspect GEL is incurring small losses from high interest cost. Proceeds from TNB’s acquisition will be used to repay borrowings and TNB expects GEL to be earnings-accretive from financial year 2018 (FY18).

The RM1.26 billion purchase of GEL will be settled via a mix of borrowings and cash, and this will bump up TNB’s net gearing position slightly from 32.6% (as of end-August 2016) to 35%, which still leaves a lot of room for further utilisation. — MIDF Research, Nov 7