TNB shares to face SELLING PRESSURE as long as 1MDB issue unresolved

PETALING JAYA - Tenaga Nasional Bhd's (TNB) share price will continue to face selling pressure as long as the 1Malaysia Development Bhd (1MDB) fiasco is unsettled, according to Kenanga Research.

Last Friday, TNB confirmed that it has received a letter of invitation from the Energy Commission to submit a proposal pertaining to the participation of TNB through a 70% ownership of Jimah East Power Sdn Bhd (JEP), the Project 3B.

This has also prompted a rebound of TNB's share price, where it closed 1.87% or 24 sen higher at RM13.10 yesterday with 17.1 million shares traded.

"However, we maintain our opinion that so long as 1MDB's asset sales of the remaining brownfield power plants (under Edra Global Energy Bhd) are not settled, TNB's share price will continue to face selling pressure on fears of overpaying," the research house said in a report yesterday.

Kenanga said operationally, after a strong 1H15 (first half of 2015), TNB is likely to face a weaker 3Q15 as the 2.25 sen/kWh rebate for March to June 2015 will be reflected then. The rebate would increase operating cost by RM545 million in 3Q15.

It added that should the government's commitment towards a fuel cost pass-through mechanism stay beyond June 2015, the strong earnings shown in 1H15 will be a one-off event as future earnings will depend mainly on its operational efficiency as fuel cost will be passed through on a six-month laggard basis.

"Our price target is maintained at RM12.78 per share for now, which is based on a five-year average of 12.8 times on calendar year 2016 earnings.

"In the near-term, we believe the share price of TNB is not likely to be fundamentally driven given the on-going 1MDB issue," said Kenanga, which maintained a "market perform" recommendation on TNB.

HLIB Research said information on the takeover exercise by TNB on Project 3B remains "skanky".

"We expect the IRR (internal rate of return) for track 3B to remain relatively low (even below the TNB threshold) despite the revised higher tariff. Nevertheless, we believe TNB taking over track 3B is the best alternative over the long term, in order to ensure reliability and security of power supply for the nation by 2018-19," said HLIB.

"We are unsure if the exercise involves payments from TNB to 1MDB and any debt transfer (debt obligation within JEP)."

It said the revised tariff of 26.67sen/kWh was 5.3% higher than the initial 25.33sen/kWh rate bid by 1MDB-Mitsui consortium back in March 2014 but believed the revised rate is meant to justify the depreciated ringgit (against the US dollar) of 15% as well as higher interest cost since March 2014.

"We believe the recent share sell down is overdone, we remained positive on TNB's long term earnings growth," said HLIB, which maintained a "buy" call with an unchanged target price of RM17.

PublicInvest Research said its back-of-the envelope calculation further suggests that the IRR for the project would be almost similar to the 5.29% increase in tariff at 26.67sen/kWh, but which would nevertheless be set-off by the higher engineering, procurement and construction and financing costs.

"Though management had earlier stressed that TNB will only accept the takeover offer if viable commercial terms are met, we feel it is likely for TNB to accept the takeover mandate. TNB has stressed that it will assess the actual cost that has been incurred by JEP and will only pay for the actual amount.

"We believe the minimum cost has been incurred as presently, no significant construction activity has been seen next to the existing Jimah Power Station site. As Track 3B was designed as a standalone plant with no sharing facilities, we think TNB will continue to construct the plant at the proposed site," said PublicInvest.

It maintained its "neutral" call on TNB with an unchanged target price of RM14.64 pending further disclosure on the takeover. - Sundaily