Tenaga makes a $300m acquisition in India

Author: kltrader   |   Publish date: Wed, 11 May 2016, 10:58 AM 

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On Monday, Tenaga Nasional Berhad (Tenaga) announced that they are buying India-based GMR Energy as part of a plan to secure new generation capacity internationally.  According to Tenaga, the entry into India is an attractive investment opportunity because of its favorable economic outlook and stable political landscape, with a rapidly growing energy sector.
Event

• Tenaga has announced that it is acquiring a 30% (fully diluted) stake in GMR Energy Limited (GEL) of India for US$300m via a subscription for new shares.

Impact

• This is part of Tenaga's medium-term plan to expand overseas to diversify its cashflow generation base. However, given the size of the acquisition relative to Tenaga's market cap, i.e. 1.5%, it is unlikely to be a needle mover.
• GEL has an installed capacity of 2,300MW with a further 2,330MW under development. Of the total capacity, 43% each is in coal and hydro, with 13% in gas and <1% in renewables.
• The transaction is scheduled to be completed by end 2016 and according to the announcement, it will be earnings accretive from FY18.
• Other shareholders of GEL are GMR and related parties (51.7%), Claymore investments (a subsidiary of Temasek - 12.4%), IDFC Consortium (5.5%) and a trust for GMR's employees (0.4%).

Action and recommendation

• MQ Research maintains their Outperform recommendation on Tenaga. MQ Research sees improved earnings and cashflow visibility from the Incentive Based Regulations (IBR) fueling an increase in dividends and driving a rerating of its shares, which at 12x core FY17E PER continue to trade at a discount to the market (15x) and gas utilities. A 5% FCF yield relative to a 3% dividend yield, despite elevated capex, does provide added opportunities for a payout ratio adjustment - which management is currently reviewing.

Source: Macquarie Research - 11 May 2016