'It will make economic sense for TNB to increase stake in Jimah power plant'

PETALING JAYA: Public Invest Research reckons that it would make economic sense for Tenaga Nasional Bhd (TNB) to increase its 20% stake in Jimah Power Station located adjacent to the 2,000MW coal-fired Track 3B power plant now that it has received government approval to takeover the latter.
"Though Jimah East was originally designed as a stand-alone power plant, it would make economic sense to share the operating facilities for both plants," said its analyst Syarifah Hidayatul Akmal in a report yesterday.
Jimah Power Station is a 1,400MW coal-fired power plant with its power purchase agreement (PPA) expiring in Dec 2033. It was initially owned by the Negeri Sembilan royal family and TNB with a 80% and 20% share respectively.
In 2013, 1MDB acquired 75% share in Jimah Power Station from the royal family for RM1.2 billion.
On Monday, the government approved the transfer by 1Malaysia Development Bhd (1MDB) of its entire shareholding interest in Jimah East Power Sdn Bhd (JEP) to TNB and Mitsui & Co Ltd.
TNB and Mitsui received additional terms and conditions on the award of Track 3B from the Energy Commission and both are given seven days to accept the terms of the addendum.
The terms and conditions included, the levelised tariff for Track 3B fixed at 26.67sen/kWh and the power plant capacity fixed at 2x1000MW with 39.5% efficiency at full load.
Additionally, JEP will be jointly owned by TNB and Mitsui with effective shareholding interest of 70%-30%.
The new scheduled commercial operation date (SCOD) for unit 1 has been delayed to June 15, 2019 instead of Nov 15, 2018 while SCOD for unit 2 has been postponed to Dec 15, 2019 instead of May 15, 2019, signaling a 7-month delay.
Syarifah said that since the news on potential takeover of 1MDB's power assets surfaced last month, TNB's share price has dropped by about 13.5% from May's high of RM14.30 to Monday's closing of RM12.60, wiping out almost RM9.6 billionn of its market capitalisation.
"We believe the negative sentiments arising from the potential takeover of both greenfield and brownfield power assets of 1MDB have been factored in the share price performance of TNB and view the recent sell down as excessive.
"At the current level, TNB's share price is trading at undemanding FY15F and FY16F price to earnings ratio (P/E) of 10 times," she said.
In addition, Syarifah viewed the government's commitment in implementing the Incentive Based Regulations (IBR) framework under the power sector reform would benefit TNB as any savings or additional expenses incurred from higher than-estimated fuel costs would be reflected in the Imbalance Cost Pass Through (ICPT) account and does not affect TNB's earnings.
"The currently weak share price of TNB which yields a 16% upside potential to our target price of RM14.64 makes its investment proposition compelling, hence we upgrade our call on TNB to outperform," she said.
AmResearch, meanwhiel, has left its "buy" call on TNB and its FY15-FY17 earnings at this juncture pending an official announcement by TNB on whether the group and Mitsui will accept the terms of the addendum.
"TNB's shares has been under heavy selling pressure of late following concerns that it will be overpaying for the 70% JEP stake. The stock had retraced by 15% since the press reported of the possibility of Tenaga taking over the project back in February 2015.
"TNB's valuations are undemanding. The stock is currently trading at FY15F-FY16F PEs of 11x, below its three-year average of 15 times. Dividend yields are also decent, at 2.7%," it said.