MIDF Research positive on Tenaga’s RM467.74 mln deal with Vortex Solar

KUCHING: The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) is positive on Tenaga Nasional Bhd’s (Tenaga) RM467.74 million (86 million pounds) deal to acquire a 50 per cent equity stake in Vortex Solar Investment Sarl (Vortex Solar), a UK renewable energy company.

In a filing with Bursa Malaysia last Friday, the energy giant announced that via its wholly owned subsidiary, TNB International Sdn Bhd (TNBI), it had entered into a Subscription and Funding Agreement with Beaufort Investments Sarl (Beaufort) to subscribe for new equity shares in Vortex Solar.

MIDF Research is positive on this deal as they believe that it will be a cheap entry point into the UK renewable market for any future renewable energy (RE) market expansions.

“The acquistion’s valuation is a at a premium to Tenaga’s own valuation. On a per mega-watt (MW) basis, the consideration of US$1.6 million per MW is much lower versus industry average costs of around US$2.5 million per MW for a new solar project, implying an attractive entry for Tenaga,” explained the research arm.

Additionally, Tenaga is also expected to benefit from the deal through knowledge sharing as Vortex Solar would be able to provide Tenaga valuable knowledge and experience in RE technology.

If successful, the acquisition will be in line with Tenaga overseas expansion plans to derive 5 giga-watts (GW) of net capacity from overseas operations by 2025 from the current 2GW net capacity from India and Turkey operations.

Currently, contributions from its overseas operations have amounted to a EBIT of RM8 billion in FY15, a negligible amount when compared to its total earnings. Tenaga expects this to increase to RM20 billion by FY25, accounting for 20 per cent of all earnings.

“While these are long-term targets, the moves underpin our view of the need for Tenaga to expand abroad for better growth potential given plateauing growth in Malaysia is at just 2 to 3 per cent per annum, and better returns from overseas generation projects 0 mostly in the teens at least, versus single digit returns in Malaysia.

“Most importantly, Tenaga’s balance sheet is underutilised at 0.3 times its net gearing, one of the most under-geared utilities in the region. As such, we believe that it is timely to reinvest into new growth opportunities,” shared research.

Midf continued on speculating that the new asset of Solar Vortex would enhance their valuation of Tenaga by an estimated 9sen per share to approximately RM16.90 per share, or a marginal 0.5 per cent, which is a considerably small transaction relative to Tenaga’s RM79 million market cap.

With this in mind, the research arm re-affirms their ‘Buy’ call on Tenaga at an unchanged discounted cash flow based target price of RM16.80 per share for now with potential upside bias from this acquisition.

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