Khazanah trims Tenaga stake through $130 million block trade

The deal attracts strong demand, particularly from domestic investors, and is priced at a tight 1.6% discount.
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Tenaga is Malaysia's leading power company
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<div style="text-align: left;"> Tenaga is Malaysia's leading power company </div>

Asian equity markets remained under pressure yesterday, adding to the woes of investors who have been losing money on many of the recent deals. But, as shown by a small block trade last night, when the right transaction comes along they are still eager to put their money to work.

In this case, the right transaction turned out to be a M$412 million ($130 million) sell-down in Tenaga Nasional by state-owned Malaysian investment company Khazanah Nasional. It is the second time in six months that Khazanah monetises a small portion of its holdings in the country’s leading power company after a similarly-sized block trade in December last year.

And investors were clearly keen to boost their holdings of a low-volatility stock in a market that has held up significantly better than its Southeast Asian neighbours amid the sell-offs in the past week.

“Malaysia is considered a bit of a safe-haven right now because it is a less volatile market and hasn’t come off as much as the rest of Southeast Asia,” one source said.

Of course, the other side of that argument is that Malaysia has also risen a lot less than the Philippines, Indonesia and Thailand earlier this year. Malaysia’s benchmark index is up 4.6% so far this year, which is well below the 16.4% gain for the Philippines and Indonesia’s 15.2% increase. Thailand is currently up 10.6%.

The bookrunners took no risks, though, and had wall-crossed enough investors to have the deal three-quarters covered at launch. The wall-crossed investors were all international accounts, but when the order books opened they were immediately accompanied by a flood of domestic demand.

According to the source, the deal was fully covered within minutes even though the shares were offered at a discount of no more than 0% to 3% versus yesterday’s close of M$8.37. When the deal closed after less than 90 minutes, it was said to very well covered although the total demand was supported by the fact that one domestic account put in an order that covered the entire transaction and a second one wanted $100 million worth of shares.

Sources said the there was a good showing from international long-only funds but in terms of the level of demand, the largest portion “by far” came from domestic investors. The allocation reflected that with about two-thirds of the shares ending up in domestic hands. In all about 40 to 45 investors participated in the transaction, they said.

The solid demand allowed the bookrunners to move the price to the mid-point of the range.

Khazanah offered to sell 50 million shares at a price between M$8.12 and M$8.37. The final price of M$8.24 translates into a 1.6% discount versus the close.

Aside from the strong demand, the tight discount was also made possible by the fact that the block accounted for just 0.9% of the company. Tenaga is also a pretty liquid stock and the shares on offer are equal to no more than five days of trading volume.

That said, the latest close is less than 1% below Tenaga’s 2013 high of M$8.45, which it first hit in mid-May and then again last week. This is the highest trading level for the company since late 2007.

The discount is also tighter than the 2% discount that Khazanah achieved on its previous sale in December last year. That trade was done at a price of M$6.78 and raised a total of $133 million.

Khazanah made three sell-downs in short succession to tidy up its portfolio in November and December last year, including a $356 million sale of its entire stake in Hong Kong-listed AIA Group and a $190 million sell-down in Malaysia Airports, and one may wonder whether this one transaction will be followed by others before the end of the second quarter.

The Malaysian investment company is expected to issue another sharia-compliant exchangeable bond and sources that say that could come in the near-term. It has mandated CIMB, Deutsche Bank and Standard Chartered for the deal, which sources say could be as large as $800 million to $1 billion, but it is still not known which stock it will use as the underlying.

Tenaga was on the list of potential candidates when banks pitched for the mandate earlier this year, and that could still be the case even after last night’s transaction.

Khazanah will still own about 32.5% in the power producer and while its remaining shares will be locked up for three months, the conversion period could be slightly delayed to account for that — if it wants to complete the EB this side of summer, that is.

Khazanah’s previous four sukuk EBs have been exchangeable into Plus Expressway, Telekom Malaysia and Hong Kong-listed Parkson Retail (twice).

Analysts are mostly positive on Tenaga with 18 out of 23 banks having a “buy” recommendation on it. However, Tenaga said in connection with the publication of its earnings for the six months ended in February this year that the prospects for the rest of the fiscal year remain challenging.

Electricity demand is expected to grow at a steady pace, but rising fuel prices remain a concern. It also expects to have to continue to use alternative fuels to make up for a shortfall in gas, which will lead to higher generation costs.   

In the six months to February revenues rose 3.8%, while net profit was marginally higher at M$2.69 billion versus M$2.68 billion in the same period the previous year. However, excluding the impact from foreign exchange translations, net profit fell 30% year-on-year to M$1.90 billion.

The block trade was jointly arranged by CIMB and Deutsche Bank.

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