Tenaga Nasional - Positive on internal promotion 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.

- Tenaga’s current chief operating officer/executive officer Dato’ Ir Azman bin Mohd has been

appointed as the replacement for outgoing Datuk Seri Che Khalib Mohd Noh as the president/chief executive officer for three years effective on 1 July 2012.

- Dato’ Azman has been with Tenaga since 1979 as an assistant district engineer in Temerloh, Pahang and oved into various positions such as – District Manager, Rawang (1982-1990), District Manager, Kajang (1991-1995), Area Manager, Perlis (1996-1998), General Manager. Customer services, Selangor (1999-2002), Assistant General Manager, Strategic Management & Organizational Development, Distribution Division (2003-2004), General Manager, Strategic Management & Organisational Development, Distribution Division (2004- 2005), Senior General Manager - Region 2 Operation, Distribution Division (2005-2007), Vice President, Distribution (2008-2010) and Executive director/chief operating officer (2010- present).

- We are positive on this appointment and internal promotion of a long-serving officer of the group, as the strong strategic direction and focus set by the incumbent president/chief operating officer is likely to be  maintained.

- Hence, 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