HLIB maintains Overweight call on Power sector

KUALA LUMPUR: HLIB Research is maintaining its Overweight call on the power sector with Tenaga Nasional Bhd (TNB) as its top pick with target price of RM15.80. 

1MDB announced that it has inked a deal to sell EDRA Global Energy assets to China General Nuclear Power Corporation and its subsidiaries (CGN Group) for RM9.83bil (US$2.3bil). CGN group will assume all the relevant gross debt and cash of EDRA, based on the March 31, 2015 valuation date.

HLIB believes the news will be a welcome relieve to TNB’s share price which has been depressed due to concerns about overpaying and it expects the stock’s share price to react positively.

“We are positive with the latest announcement; given the heightened political issues surrounding the controversial EDRA Global Energy assets has finally been put to rest. The transaction has put an end to speculations and concerns on Malaysia’s listed power utility companies, especially TNB, in taking over EDRA at high valuation, a move seen as bailing out the controversial power assets,” it said in a note on Tuesday.

The deal is part of 1MDB’s move to pare down its RM42bil debt. EDRA was reported to be valued at RM18bil in 1MDB books. The transaction is expected to be completed in February 2016.

The research house is not too concerned of the China-based company’s entrance into the Malaysian power sector, seeing that CGN will only control 3,640GW or 15.6% of Peninsular Malaysia’s power generation capacity, with majority still controlled by TNB (54.9%) and Malakoff (21.3%). 

CGN’s power assets are also governed by strict PPAs’ terms and conditions, which protect the interest of both parties (CGN and TNB). 

“However, we are unsure at this juncture, if CGN is allowed to own 100% of Malaysia power assets or CGN may need to pare down its stake to local partners in the future,” it said.

CGN has strong expertise in nuclear power, which Malaysia may leverage on in the future.

HLIB kept its forecasts on the sector unchanged.