Tenaga Nasional (TNB) announced that it has submitted an indicative nonbinding proposal to acquire the five domestic and eight international power assets of 1MDB. Although we had earlier anticipated that TNB could be interested in acquiring 1MDB‟s Jimah Power Plant which is located adjacent to Track 3B, this announcement has indeed caught us by surprise as we did not expect TNB to be interested in 1MDB‟s power assets in entirety. We are neutral on the deal at this juncture pending further details, and most  importantly pricing, despite TNB‟s insistence that the acquisitions fit in with its growth strategy. The deal is currently in the initial phases with no assurances that it will be concluded. We maintain our estimates for now as most details remain subject to the confidentiality arrangement between the related parties but we could see some short term negative reaction to TNB‟s shares due to concerns on the acquisition price. We see this as an opportunity to accumulate however, as we believe TNB‟s longer-term fundamentals remain intact. Our Outperform call is retained.

• 1MDB’s power assets. 1MDB owns five domestic power assets with total generating capacity of approximately 3600MW. It was reported that 1MDB had acquired Powertek Energy at RM8.5bn, 75% stake in Kuala Langat Power Plant (previously known as Genting Sanyen) at RM2.3bn and 75% stake in Jimah Power Station at RM1.2bn. The acquisitions costing about RM12bn were completed in 2012. 1MDB‟s portfolio includes 15 power and water desalination plants in five countries with a net power generation capacity of 5594MW.

• Acquisition price is the main concern. At a glance, 1MDB‟s acquisition price of RM2.3bn in 720MW CCGT Genting Sanyen in 2012 with its PPA expiring in 4 years seemed expensive as compared to TNB‟s Prai CCGT cost of about RM3bn. TNB‟s Prai is currently under construction and expected to commence operations on 1 January 2016. Separately, Malakoff acquired 75% stake in OCGT PD Power from Sime Darby in 2014 with about 18 months remaining in its concession life for RM300m. Hence, the price tag of RM8.5bn in 2012 for the three domestic power plants, 434MW  OCGT Powertek with about 4 years remaining in its concession, 322MW CCGT Pahlawan Power with about 8 years remaining and 720MW CCGT Panglima Power with about 11 years remaining, and interests in the international assets look seemingly pricey.

• Impact to TNB. While the acquisition may be positive in the long term to TNB, we are neutral on the deal pending further announcement on the acquisition price. Even assuming TNB gets an unlikely 50% discount for 1MDB‟s brownfield power assets which translates to about RM6bn and taking into account cost for Track 3B, we estimate TNB‟s net gearing will already double from around 30% to 60%.