TNB completes renewable energy portfolio in UK

National power company buys two wind farms

Tenaga Nasional Bhd (TNB) will finally own a complete renewable energy (RE) portfolio in the United Kingdom (UK) pursuant to its 80% acquisitions of two wind farms in that country.

With the acquisitions, the country’s main power generator says it will see optimal power generation during all weather seasons: both summer and winter.

The new wind power portfolio in the UK means that it will now be able to generate more revenue in the winter season, in addition to what it is able to generate from its solar farms, which it acquired in 2017 during the summer months.

“This (latest) acquisition will complement TNB’s solar renewable energy assets in the UK by ensuring stable portfolio revenue generation all year round,” the company says.

The acquisitions, which were announced on Thursday, saw TNB, through its unit Tenaga Wind Ventures UK Ltd, acquiring 80% stakes in GVO Wind Ltd and Bluemerang Capital Ltd for RM418.7mil.

The stake purchase will be funded by a combination of internally generated funds and borrowings but this won’t have a material impact on its gearing, the group says.

TNB says the stake purchases will see it become a majority shareholder of the largest feed-in tariff (FiT) wind farm portfolio in the UK with 53 operational onshore medium wind turbines and a total combined capacity of 26.1 megawatts (MW).

Management of the portfolio will be outsourced to Longspur Capital Ltd, which is manned by experienced personnel from the former managers of the acquired assets.

The wind portfolio comprises young assets, with an average age of 2½ years with an estimated useful life of up to 25 years.

While no immediate complete pricing details were available on the acquisition of these wind farms, MIDF Research says in its report that the acquisitions look pricey on the surface.

The price is some 37.9% higher than the top end of recent onshore wind farms’ costs, data by MIDF Research reveals.

“Recently constructed (2013-2015) onshore wind farms in the UK entail costs of between £3.5mil – £4.1mil per MW. TNB’s purchase of the wind renewable energy assets translates to £6.6mil and looks on the high side,” MIDF Research said in a report yesterday.

“However, the majority of the portfolio is contracted through the UK Government backed FiT support mechanism and guaranteed export tariff over a period of 20 years.

“The average revenue for the portfolio is approximately £223/MWh,” he adds.

The average revenue of £223/MWh is significantly higher than average values of other similar renewable energy assets across the UK and Europe, TNB notes in its circular to the Bursa Malaysia.

The acquisitions will also increase TNB’s net capacity in international renewable energy (RE) to about 280MW, it says.

In its annual report 2017 that was published in November 2017, TNB says it sees venturing into international markets as one of the key components in its future.

Apart from the UK, the other international market that TNB is present in is in India.

In November 2016, the group completed its 30% acquisition of India-based power company GMR Energy Ltd for six operational power assets in India, with a combined total capacity of 2,299MW.

In the UK, TNB also already owns a 50% share in Vortex Solar Investments Sarl that provides it an operational 365MW solar photovoltaic portfolio in the UK through Vortex Solar UK Ltd. MIDF Research says that the latest wind farm acquisitions would have marginal impact on TNB’s earnings.

The research house has maintained its “neutral” call on the stock with an unchanged discounted cash flow (DCF)-derived target price of RM16.30, noting that while dividend yields are still relatively attractive, TNB’s inflated earnings seen during the regulatory period 1 (RP1) are unlikely to be sustained in RP2.

The research house suggests investors lock in the profits at the current price point, noting that the stock has had a good run in the past year.

Meanwhile, PublicInvest Research also says in its report that it has maintained its earnings forecasts for TNB at this juncture, given that the eventual contributions from these acquisitions are not likely to be very significant.

PublicInvest Research has maintained its “outperform” call on TNB with a DCF-derived target price of RM17.81.

Stock price reaction to the acquisition was muted on the day it was announced and also the day after. The announcement also came a day after the group announced its four-month financial period ended Dec 2017 result (due to the adjustment in financial year end from Aug 31 to Dec 31).

TNB has been trading in a tight price range since Jan 9 of RM15.50 at the lower end and RM15.96 at the higher end.

Generally from price and volume action the market seems to be quite cautious about the stock’s uptrend, but dealers say prices could build on its present gains if good news continues to flow in, and if TNB meets or beats its earnings forecasts. Most analysts are upbeat on the stock, with 64%, or 16 research houses, rating TNB a “buy,” eight rated it a “hold” while one rated the stock a “sell.”