Tenaga Nasional - Valuation kicker – gas supply, tariffs & PPA drivers BUY

We reiterate our BUY call on Tenaga Nasional (Tenaga), with a higher DCF-derived fair value of RM7.35/share (vs. an earlier RM6.95/share), which implies a CY12F PE of 13x and a P/BV of 1.3x. 

We have raised Tenaga’s FY13F-FY14F earnings by 4% with a slight 0.5% increase in average electricity  price, which we conservatively expect as the net tariff arising from the cost pass-through adjustment in tandem with the new gas price arising from the 200mmscfd supply from the Malacca regassification plant in August this year.  Our FY12F-FY14F earnings, which also assume the continuation of fuel cost sharing – arising from natural gas shortfalls – with Petronas and the government, are 11%-30% above general consensus’ estimates.

Assuming 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 to rise by 50% from RM13.70/mmbtu to RM20/mmbtu. 

This could be offset by an 11% increase in average electricity tariffs, given that gas cost currently accounts for 23% of Tenaga’s electricity revenue in Peninsular Malaysia. We believe that this may be palatable given the 7% hike in the last tariff review in May last year and a 24% jump back in July 2008.

We remain positive on Tenaga given multiple valuation kickers from:- (1) Re-pricing of electricity and fuel tariffs 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 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. 

Since we raised our recommendation from HOLD to BUY back on 13 September last year, the share price has risen by 20%, outperforming the FGBMKLCI by 10%. The stock still trades at a P/BV of 1.1x, 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