Tenaga Nasional - 80% tariff cut for half of Gen-1 PPA? 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.

- The Edge reported that the first generation power purchase agreements (PPA) could be lowered by over 80% from RM35-RM50/kWh per month to RM6/kWh per month. The reportsaid that the six bidders- Powertek, Genting Sanyen Power, YTL Power Generation, Port Dickson Power, Segari Energy Ventures and Tenaga – are in the running to extend  the power generation capacity of up to 2,350MW, with negotiations at internal rates of below 10%. 

- This means that 57% of the PPAs of the total first generation capacity of 4,115MW could be extended. The decision for the tender is expected to be revealed by the end of July this year.

- Based on our estimates, an 80% reduction in the capacity charge of 2,350MW would translate to RM1.2bil or 66% of FY13F net profit. But we understand that a large portion of the cost savings could be used to offset the higher natural gas costs arising from the commencement of 500mmscfd Lekas regassification plant in September this year. Hence, we maintain FY12F-14F earnings for now.

- But since not all the first generation PPAs will be renewed,  the Energy Commission has opened the tender for the 1,400MW new combined cycle gas-fired power plant in Prai, with the shortlisted bidders being Tenaga, Sime Darby Power, Genting’s Mastika Legenda, Amcorp Power, CI Holdings-Teknonolgi Tenaga Perlis Consortium-Dealim Industrial Co, Malakoff, Petronas Power, Mitsubishi, YTL Power-Marubeni Corp and Powertek-Mitsui & Co.

- More tenders are in the pipeline, including for a 1,000MW plant expected to be open for bidding in 2H2012 with commissioning in 2017. There could also be an additional 2,000MW capacity in 2018-2019.

- We remain positive on Tenaga due to:-  (1)Stabilising natural gas supply from the Lekas regassification plant in Malacca by September this year will provide clearer earnings visibility, (2) Falling global coal price, currently below US$80/tonne, will positively transform the company’s cost structure, (3) Pending the upcoming elections, there is a possibility that Petronas and the government will continue to bear the higher liquefied natural gas costs from the Malacca regassification plant, which could mitigate further fuel cost pressures, and (4) New PPAs in an open tender environment, with Tenaga as the bidder and sole off-taker, will further drive its fixed power purchase costs lower.

- 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