By Khairul Khalid
Tenaga Nasional Bhd’s possible buyout of ailing 1MDB’s power assets triggers a nervous selldown, causing it to lose RM6 billion market value in six days. Could TNB get a fair deal and would its shareholders approve?
Business model: Rumours were circulating last week that Tenaga Nasional Bhd (TNB), Malaysia’s largest electricity utility, was considering the purchase of power assets belonging to the controversial 1Malaysia Development Bhd (1MDB). Troubled 1MDB, reported to be in RM42 billion debt, is a strategic development fund wholly owned by the Malaysian government.
This week, the market reacted negatively to speculation linking TNB and 1MDB in a deal which could be worth up to RM16 billion. TNB lost approximately RM6 billion in market value in six trading days, as reported by The Star on May 26.
According to UOB Kay Hian (UOBKH), the buyout of 1MDB’s power assets will be followed by a proposal to unbundle TNB’s business into three separate entities – power generation, transmission, and distribution divisions.
TNB’s president and chief executive officer (CEO) Azman Mohd assured that any acquisition will have to be fairly priced and TNB will not be paying over the odds. The proposal is expected to be discussed in the cabinet as early as next month.
TNB was founded in 1949 and its main business is the generation, transmission, distribution, and sale of electricity in Malaysia. The company also manages and operates the national power grid, which is connected to Thailand’s transmission system in the north and Singapore’s transmission system in the south.
Shareholders and management: According to a UOBKH report dated May 26, 2015, TNB’s biggest shareholder is Khazanah Nasional Bhd with a 32.4% stake, followed by the Employees Provident Fund (12.1%) and Skim Amanah Saham Bumiputera (8.4%).
TNB president and CEO Azman Mohd has had a long career with TNB. He started out out as an assistant district engineer at TNB Temerloh/Mentakab in 1979. He was promoted from chief operating officer to CEO in July 2012.
Share performance: TNB’s share price closed trading yesterday at RM13.34, down 6 sen.
What analysts think: According to a report by UOBKH, the negative market sentiment about TNB’s potential purchase of 1MDB’s power assets under Edra Energy has already been taken into consideration.
“Share price has retraced 6% since last Friday due to knee-jerk reaction of a perceived ‘bailout’ of 1MDB by TNB via a pricey acquisition of assets. Thus, we believe the negative news flow is largely priced in,” said UOBKH.
UOBKH also feels that if TNB were to purchase 1MDB’s power assets, it would not be such a bad thing after all.
“It will allow TNB to cement its market leadership position (current power generation market share at 53%) in an eventual power pooling market and may be a positive development for the long run. Thus, conceptually, we can identify with the future earnings prowess from purchasing Edra’s power assets as a much longer-term catalyst,” said UOBKH.
UOBKH also said that TNB may want increased exposure in the Middle East, through 1MDB’s Powertek power assets, to expand its regional footprint via the potential acquisition.
However, a major problem for the deal would be the valuation, said UOBKH.
“If TNB is to pay RM16 billion for Edra’s Malaysia power plants – excluding its Mena power assets under Tanjong Energy, we consider this expensive. We estimate Edra’s Malaysian assets are worth RM11.6 billion based on current replacement market value (we assume gas-fired power plant replacement cost of RM2.3 billion and coal-fired power plant replacement cost of RM6.7 billion),” said UOBKH.
This would be a pricing discrepancy of almost 40% and could be a stumbling block. A potential takeover would also require TNB to call for an extraordinary general meeting.
“As the ultimate shareholder is the Finance Ministry for both 1MDB and TNB, Khazanah (which owns 32.4% of TNB) will have to abstain from voting. A pricey acquisition may not get a buy-in from key minority shareholders, including EPF, Permodalan Nasional Bhd (PNB), and Retirement Fund Inc (KWAP),” said UOBKH.
Earnings forecast:
StockStalk: Even though the reaction to the 1MDB rumours can be dismissed as a temporary knee-jerk reaction, the public’s strong reaction towards 1MDB’s financial woes cannot be discounted. The fall in TNB’s share price, subsequent to rumours of its purchase of 1MDB’s power assets, is testament to the public negativity surrounding 1MDB in recent months.
Nevertheless, investors may find it to be a good time to buy into TNB at its current low price. The stock is currently trading below its five-year average price earnings of 11.6 times.
TNB’s fundamentals are still strong, considering the company’s monopoly of the electricity distribution sector in the Peninsular Malaysia, its strong cash flow, and continued low fuel prices.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KiniBiz makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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