Monday, August 1, 2011

Tenaga ... Aug11

Given the current circumstances, Tenaga is looking more like a prime privatization candidate. This is because despite getting its long awaited tariff hike in both Peninsula Malaysia and Sabah, the company’s share price has been depressed over fuel worries which has obscured its true value.

So it may be argued that taking Tenaga private and breaking it up could possibly unlock better value of its various divisions as well as expose any potential weaknesses within.

Khazanah hold 35.63% stake, EPF holds 13.96% while Amanahraya Trustees Bhd Skim Amanah Saham Bumiputera holds 9.84% equity interest.

If Khazanah and EPF were to team up again to take Tenaga private, it would cost the two organizations about rm16.7 billion at current valuations to mop up shares these entities does not own.

Outlook for the company is still foggy. Although Tenaga is expecting to be a better year for Tenaga, the thorny issue of fuel costs casts a question mark on whether the company will be able to absorb the increases. Coal in particular has remained a persistent issue for Tenaga, with increased usage of unsubsidized coal putting a dampen in margins.

With so much uncertainty hanging over the company, taking it private at this stage would mean shielding its shareholders from the fossil fuel roller coaster. Another potential catalyst for the stock is the government’s plan to gradually reduce its subsidy burden, which has not always gone over well with the public.

This does not mean that all of Tenaga should be privatized. Breaking the company up into its various divisions could enable the company to finally rid itself of its legacy issues by identifying the deadwood. And there is nothing to stop Tenaga’s major shareholders from re listing the company once it is on better footing.

Privatization would also give Tenaga greater freedom to expand its overseas aspirations, as it seeks to secure more deals in the Middle East without exposing its shareholders to the risks.

It appears that Tenaga has reached a crossroads. Although there is potential to grow the company further, there seems to be a number of roadblocks in its way.

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