Will 1MDB’s power acquisitions pay off?

By Jose Barrock

In our continuing series on 1Malaysia Development Bhd, KiniBiz looks at the fund’s power deals and why it is going into them. Analysis shows that payment for the power assets are excessive and reflects a desperate attempt to inject cash-generating assets  which will help the fund repay expensive borrowings, now pushing RM20 billion.

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1Malaysia Development Bhd’s (1MDB) acquisition of power generation assets in quick succession—three large outfits costing RM12.5 billion in a span of 12 months—- raised many questions, and had the market guessing which independent power producer (IPP) would be next on the list.

But then again, so far everything related to 1MDB has raised plenty of questions— with no answers available.

But why IPPs, why not other businesses?

A fund manager explains, “When you have issued so much in debt papers (in this case almost RM20 billion), you need to buy assets with strong cash flow, such as IPPs or NFOs (numbers forecast operators)…since NFOs are frowned upon and are un-Islamic, 1MDB opted for power assets,” he explained.

In earlier articles, KiniBiz examined the flawed business model of 1MDB, the people behind 1MDB, its structure and deals which funnelled funds into partner PetroSaudi International Ltd, and bond issues which were mispriced to the tune of billions of ringgit.  Today, we look at 1MDB’s acquisitions of power generation assets.

Jimah Energy for RM1.7 billion?

Latest on the list of acquisitions, according to Bloomberg, is the 1,400 MW coal fired Jimah Energy Ventures Holdings Sdn Bhd for a staggering RM1.7 billion. While news of this acquisition has circulated, 1MDB true to form has kept mum, meaning it is not clear if the acquisition has been concluded.

Questions sent by KiniBiz earlier were unanswered at press time.

The question is why is 1MDB paying so much, and will 1MDB be able to sustain after buying Jimah Energy Ventures Holdings and forking out RM1.7 billion for the power generation assets?

It was known in the market that a government linked company (GLC) which was eyeing Jimah Energy ventures Holdings had pegged a price tag of about RM1 billion on the Port Dickson based power producer, only a few months ago.

“They (1MDB), according to the press reports, offered RM700 million more…one of the valuations is way off,” an analyst said.

A check with the Companies Commission of Malaysia (CCM) indicates that Jimah Energy Ventures Holdings is an investment holding company and wholly owns Jimah Energy Ventures Sdn Bhd (JEV), which owns and operates the power generation assets.

Jimah Energy Ventures Holdings is 65 percent controlled by members of the Negeri Sembilan royal family, namely Tunku Naquiyuddin Tunku Ja’afar and Tunku Mudzaffar Tunku Mustapha, 20 percent by state controlled utility giant Tenaga Nasional Bhd and five percent by Menteri Besar Negeri Sembilan (Diperbadankan), which is possibly like a golden share, and 10 percent by Jimah O&M Sdn Bhd which has the mandate for the operations and maintenance of the power plant and is controlled by individuals Johari Kamil and Zulkifli Ibrahim.

JEV has a 25 year concession starting January 2009 to supply power to Tenaga Nasional. Despite the concession period still having a 21 year duration to run, the RM1.7 billion price tag was frowned upon.

In the tail end of 2009 it was reported that Halim Saad was looking at buying JEV— and his offer price was in the region of RM700 million.

It was then explained that JEV was operating below its optimum level, resulting in the company not raking in cash as expected, which was the reason why the shareholders of JEV were looking to exit.

Other parties that were reported to be interested back then were Malakoff Bhd, controlled by Syed Mokhtar Albukhary’s MMC Corp Bhd, but the bid had been inferior to Halim’s.

So what could have nudged JEV’s price up by one billion ringgit in four years?

We examined JEV’s financials. For its financial year ended December 2011, JEV had non-current assets of RM4.79 billion, current assets amounting to RM1.05 billion, and on the other side of the balance sheet the company had long-term debt commitments of RM5.24 billion and short term liabilities of slightly above RM1 billion.

Interestingly enough JEV suffered an after tax loss of RM105.15 million on the back of RM2.50 billion in revenue for its year ended December 2011.

JEV also had negative reserves of RM399. 44 million for the year ended December 2011.

So RM1.7 billion seems like a high price to pay for a loss making asset. And this comes on the back of one concluded IPP acquisition by 1MDB which came under flak.

RM2.3 billion for Genting’s power assets

In mid-August last year 1MDB acquired diversified Genting Bhd’s power assets held under Mastika Lagenda Sdn Bhd for RM2.3 billion. What was odd was that the Genting concession to supply power to Tenaga Nasional is slated to expire in February 2016.

So why pay RM2.3 billion for an asset that has a concession period of three and a half years left?

Adding salt to the wounds was that Genting in its announcement that it is “expected to record a one-off net gain of approximately RM1.9 billion from the proposed disposals.”

To recap, Genting had a 720MW gas-fired combined cycle power plant in Kuala Langat, Selangor, and the power plant commenced commercial operations in 1995, supplying electricity to Tenaga Nasional under a 21-year power purchase agreement.

While Genting states clearly that it has submitted a proposal for an extension with the Energy Commission, there seems little reason for 1MDB to pay RM2.3 billion for expiring power generation assets.

1MDB in its announcement said, “The acquisition is a step towards greater efficiency and a more sustainable energy security in the long term, as power availability is critical to maintain investors’ confidence and to support the economic growth of the country,”  That is a lame effort to try and put some strategic merit to the deal.

Mastika Lagenda, a check on the CCM reveals, posted a net profit of RM227.78 million on the back of about RM979 million in sales for its year ended December 2011. This would indicate that the RM2.3 billion price tag is about 10 times the company’s earnings for 2011 to give an earnings yield (net earnings as  a percentage of purchase price).

While this is above 1MDB’s debt cost of 6.1-6.7 percent, cash flow is likely to go negative if repayment of principal is taken into account not to mention the expiry of the concession three years down the line.

Mastika Lagenda had non-current assets of RM656.95 million and current assets of RM526.4 million. On the other side of the balance sheet Mastika Lagenda had short term debts of RM311.12 million, and long term debt commitments of RM124.389 million.

Despite the good balance sheet, Mastia Lagenda’s concession ending in three and a half years cannot be ignored, and its balance sheet could look very different once the concessions ends.

Another way of looking at it is— while the company may seem capable of paying finance costs and bank borrowings now, it may not be able to once its concession ends.

With two out of three acquisitions seemingly unwise, we venture on to 1MDB’s largest power generation acquisition—that of tycoon Tatparanandam Ananda Krishnan’s Tanjong Energy Holdings Sdn Bhd, for a whopping RM8.5 billion.

The acquisition of Tanjung Energy Holdings for RM8.5 billion

At the end of  July 2010 Ananda Krishnan privatised Tanjong plc offering RM21.80 per share, for the 53 percent he didn’t own in Tanjong, forking out RM4.7 billion in the process. This valued Tanjung at RM8.8 billion.

Tanjong had two main businesses, numbers forecast operator Pan Malaysian Pools Sdn Bhd and power generation under Tanjong Energy Holdings Sdn Bhd. The company has 13 power generation plants located in Malaysia, the Middle East and North Africa among others.

While several international private equity firms and a consortium led by the Cheng family expressed interest to acquire Tanjong’s gaming business, Ananda Krishnan sold it off to a consortium for RM2.1 billion, in August 2011. Among the members of the consortium members were tycoons William Cheng of Lion group, Quek Leng Chan of the Hong Leong group and Lim Kok Thay of Genting group.

Thus when 1MDB acquired Tanjong Energy Holdings for RM8.5 billion in March 2012, many were fuming at how Ananda Krishnan purportedly made a cool, RM1.8 billion in a span of less than two years, asset stripping Tanjong and selling off the assets.

But was it Ananda Krishnan’s guile and business acumen that netted him the cool RM1.8 billion, or was it just 1MDB overpaying for assets like it seems to have done on other occasions?

What seems clear is that 1MDB may have overpaid for Tanjong’s power assets and could face some difficulty servicing its debts.

Tanjong Energy Holdings name was changed to Powertek Energy Sdn Bhd on August 16 last year. Interestingly enough Powertek Energy is wholly owned by Powertek Investments Holdings Sdn Bhd, which in turn is wholly owned by 1MDB Energy Ltd.

A check on the CCM reveals that Powertek Energy for its financial year ended January 31, 2012, posted a profit after tax of RM515.87 million from RM2.35 billion in revenue. Powertek Energy as at end January last year had non-current asset worth RM6.35 billion and current assets worth RM2.69 billion. The company had long term liabilities of RM4.76 billion and short term debt commitments of RM786.41 million. It is also noteworthy that Powertek Energy had RM3.12 billion in reserves.

So the RM8.5 billion acquisition price tag, works out to about 16.5 times FY2012 earnings.

1MDB or an earnings yield (earnings as a percentage of acquisition price) of around six per cent which is still lower than 1MDB’s debt cost of between 6.1 and 6.7%.

However not everything will remain status quo. Out of Powertek’s three local IPPs, the 440MW Teluk Gong power plant’s concession expires in 2016, while Pahlawan Power’s 330MW concession expires in 2020 and Panglimas Power’s 720 MW concession expires in 2023. They account for some 40% of power-generating capacity. Other concessions around Asia which span from 8MW to 683MW expire between 2012 and 2028.

But then there’s talk of 1MDB floating the shares of its power assets, which will unlock the value of its investments. This could happen sometime this year, reports say.  But what kind of value will it get for relisting when it overpaid in the first place? And it will still have to maintain a majority stake at considerable cost.

The power acquisitions that have been made certainly seem to be on the expensive side while the one being contemplated, if made at the same price, will be very expensive as well. At best they are desperate attempts to get cash-generating assets to mitigate loan repayment obligations, at worst they represent mispricing to get gains for others.

In either case, they are likely to spell trouble later for 1MDB when it comes time for full repayment.