TNB’s Gama Enerji deal fails to excite investors

by **Cals** Thu 17 Dec 2015, 00:30

TNB’s Gama Enerji deal fails to excite investors

By Sangeetha Amarthalingam / The Edge Financial Daily | December 16, 2015 : 9:59 AM MYT

This article first appeared in The Edge Financial Daily, on December 16, 2015.

KUALA LUMPUR: [size=16]Tenaga Nasional Bhd ([You must be registered and logged in to see this image.] Valuation: 1.80, Fundamental: 1.30)’s (TNB) acquisition of a 30% stake in Turkish power company Gama Enerji AS has failed to excite investors as shares in the national utility company slipped two sen or 0.16% lower to close at RM12.82 yesterday.

Its shares fell as much as 24 sen or 1.8% to reach a one-month low of RM12.80, before closing higher. Year to date, TNB’s share price has fallen 7.1%, slightly outperforming the FBM KLCI’s 7.86% decline.

On Monday, TNB announced that it is purchasing a 30% stake in Gama Enerji for US$243 million (RM1.045 billion). The group will finance the acquisition via a mix of internal funds and external debt.

Analysts expect TNB to be able to finance the proposed acquisition easily, noting that it has more than RM8.8 billion in cash and cash-like assets as at end-August 2015.

“While TNB did not disclose any financial information on Gama Enerji, we believe that the acquisition will not have a big impact on TNB’s earnings. Assuming an internal rate of return of 10%, we estimate that the acquisition will enhance TNB’s earnings per share forecast for the financial years ending Aug 31, 2016 (FY16) to FY18 by only 1%,” said CIMB ([You must be registered and logged in to see this image.] Valuation: 1.65, Fundamental: 0.55) Research in a note to clients yesterday.

“Also, TNB will not consolidate Gama Enerji’s liabilities as the stake will be equity-accounted,” it said, adding that it is “neutral” on the deal as it should only have minimal impact on the group’s earnings.

CIMB is of the view that the proposed acquisition is consistent with TNB’s ambition to expand its footprint beyond Malaysia.

“Its cash flows are more stable now as the incentive-based regulation was implemented smoothly, while the need for new generation capacity in Malaysia is slowing due to the weaker-than-expected electricity sales. TNB could potentially reinvest its cash flows in overseas projects,” it said, keeping its “add” call on TNB and target price (TP) of RM15.70.

CIMB said the acquisition also does not change its view that TNB could raise its dividend payout in the near future. The research firm sees TNB potentially generating RM7 billion to RM8 billion in free cash flow per year over the next three years, as its power plant projects are gradually completed.

“If it pays out only half of its free cash flow as dividends, we estimate that its dividend yield will rise to 4.8% to 5.5% in FY16 to FY18, more than double its dividend yield in FY8/FY15,” it added.

PublicInvest Research also sees the proposed acquisition having an immaterial effect on TNB’s net assets and gearing as funding will be carried out by a special purpose vehicle.

“We understand the acquisition shall not have a significant impact on TNB’s earnings in the near term and therefore maintain our forecasts and estimates. We continue to like TNB due to its defensive nature, resilient earnings, and undemanding valuation which is trading at a forward price-earnings [ratio] (PER) of less than 11 times,” it said, maintaining its “outperform” call on TNB with an unchanged TP of RM14.97.

PublicInvest Research also deemed the purchase price paid by TNB as “fair”.

“Based on TNB’s 30% stake of US$243 million, Gama Enerji is valued at US$810 million. Based on the effective installed capacity of about 1,500mw for current and upcoming power assets, and also 100 million cu m per day water conveyance project in Amman (Jordan), we think the purchase price paid by TNB is ‘fair,’” it said.

TA Securities, meanwhile, views the acquisition price as reasonable, given that the bulk of Gama Enerji’s assets are relatively new and backed by long concession periods (30 to 50 years).

“It (Gama Enerji) will also give TNB the exposure into renewable energy and the water supply sectors,” it said.

“According to the information on Gama Enerji’s website, the effective capacity of the power assets it owns (including Kirikkale, which is currently under construction) is 1,214.5mw. Excluding Birecik, which operates on a build-operate-transfer model and the concession period will end in 2016, the effective generation capacity is 1,094mw.

“Based on these figures, the acquisition price works out to US$0.67 million per mw and US$0.74 million per mw respectively. In this perspective, the acquisition price appears to be reasonable,” said TA Securities, maintaining a “buy” call on TNB with a TP of RM17.07 based on target PER of 14 times.
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