Tenaga Nasioanl - Gas supply to stabilise with Petronas’ deal with Keppel BUY

- We reiterate our BUY call on Tenaga Nasional, with an unchanged DCF-derived fair value of RM7.35/share, which implies a CY12F PE of 13x and a P/BV of 1.1x.

- Petroliam Nasional (Petronas) has signed an agreement to increase its supply of natural gas to Keppel Corporation’s wholly-owned Keppel Energy by 43 million cubic feet of gas per day (mmscfd) to 115 mmscfd.

- Under the 18-year agreement, Petronas will supply the gas through a new 5-kilometre pipeline that will link its peninsular gas utilisation (PGU) pipeline from a metering station at Plentong in Johor to Singapore's main gas network. Petronas Gas and Keppel Gas will jointly build the pipeline, which is scheduled for completion by the middle of next year. The gas will be used to power Keppel Energy’s 500 megawatt cogeneration plant currently under construction on Jurong Island.

- Recall that Tenaga has been suffering from a natural gas shortfall since early last year due to Petronas’ unscheduled upstream maintenance works, which at one point forced Tenaga to temporarily purchase electricity from YTL Power’s Singapore-based Power Seraya plant. But this sale to Keppel underpins our confidence that Petronas’ gas supply issues should be fully alleviated with the 500mmscfd Lekas re-gassification plant in Malacca, which commences operation in August this year. Out of this capacity, 200mmscfd will be supplied to the power sector.

- We remain positive on Tenaga due to:- (1) Stabilising natural gas supply will provide clearer earnings visibility, (2) Falling global coal and US-based natural gas prices, which will positively transform the company’s cost structure. A US$10/tonne decrease in coal costs will raise FY13F net profit by 14%, (3) Likelihood that Petronas and the government will continue to bear the higher liquefied natural  gas costs from the Malacca regassification plant in the near term (due to political factors), which could mitigate further fuel cost pressures, (4) New plant-ups to replace the first generation independent power producers, with expiring power purchase agreements likely to reduce capacity payments. In an open tender environment with Tenaga as the bidder and sole off-taker, fixed power purchase costs are likely to decline.

- The stock currently trades at a P/BV of 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