Tenaga Nasional - Further rerating on declining gas and coal prices BUY

- We reiterate our BUY call on Tenaga Nasional (Tenaga), with an unchanged DCF-derived fair value of RM7.35/share, which implies a CY12F PE of 13x and a P/BV of 1.3x. 

- Tenaga’s earnings prospects are being transformed by declining coal and natural gas prices, driven by rising shale gas supply and slowing demand from China amid rising coal supplies from Australia and Indonesia.

- Coal, which accounts for 43% of Tenaga’s 1QFY12 fuel costs, has seen a price decline of 24% since its 2011 peak of US$138.50/tonne (Newcastle spot at 6,700 calorific value) in June last year. At current prices, Tenaga’s all-in blended costs of US$95/tonne translate to 14% below our FY12F-FY14F coal assumption of US$110/tonne.

- Additionally, concerns on an unpalatable increase in electricity tariff with the new gas supply from the Melaka regassification plant by August this year is being alleviated given that Henry Hub natural gas prices have fallen by 56% since its January 2011 peak to US$2.19/mmbtu (RM6.60/mmbtu). This is half the price of RM13.70/mmbtu which Tenaga is paying to Petronas.

- Assuming a price of RM7/mmbtu for natural gas supplied via Petronas Gas’ peninsular pipeline and a 20% premium (for added gas processing and transport costs by Petronas Gas) to Japan’s LNG current import price of US$17/mmbtu from Qatar, we estimate Tenaga’s blended gas costs could rise by only 6% from RM13.70/mmbtu to RM14.50/mmbtu. This could be easily offset by a slight 1% increase in average electricity tariffs, given that gas cost currently accounts for 23% of Tenaga’s electricity revenue in Peninsular Malaysia. 

- Besides lower energy costs, other valuation kickers for Tenaga stem from:-

(1) Re-pricing of electricity and fuel tariffs, which has usually yielded a net margin upside for Tenaga in the past. The power-gas price adjustment in May last year provided a 2% net tariff increase. If the power tariff structure adjusts the embedded coal price of US$85/tonne currently to our assumption of US$110/tonne, net electricity prices will rise by 1.6%, translating to a 32% increase in FY13F net profit.

(2) Improving gas supply from an additional 70mmscfd from the Joint-Development Area with Thailand in 1QCY12 and the Malacca regassification plant in August this year.

(3) Positive policy moves by the government and Energy Commission to encourage first generation independent power producers to accept lower capacity payments for extension of their power purchase agreements. We estimate that a 10% reduction in the capacity charge of the first generation’s 4,115MW could translate to an 11% increase to Tenaga’s FY13F net profit. 

- The stock still trades at a P/BV of 1.2x, at the lower range of 1x-2.6x over the past 5 years. Earnings-wise, Tenaga offers an attractive CY12F PE of 11x compared with the stock’s three-year average band of 10x-16x.

Source: AmeSecurities