Tenaga Nasional - Negotiating for RM1.6bil gas compensation 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 Star reported Tenaga’s outgoing president/chief executive officer, Dato’ Seri Che Khalib Mohd Noh as saying that the group is in discussions with the government for a RM1.6bil compensation due to the supply of additional 150 million standard cu feet per day (mmscfd) in FY13F. 

- This sum is based on the assumed market price of RM45/mmbtu for liquefied natural gas which will be delivered to the Lekas regassification terminal in Malacca that is on track to commence operations in September this year. The compensation assumes that a natural gas volume of 1,100mmscfd will continue to be supplied to Tenaga at the regulated price of RM13.70/mmbtu. 

- We are not surprised by this development, as any additional gas cost is likely to be either borne by Petronas or consumers. As such, we maintain our assumptions which do not incorporate any changes to gas price or electricity tariffs in our forecasts. 

- Khalib said that Tenaga is uncertain if the government will continue with the fuel sharing mechanism or share the costs with consumers. Note that Khalib’s position will be taken up by Dato’ IR Azman Mohd by the end of this week.

- Recall that the additional costs from distillate arising from natural gas shortfall below 1,250mmscfd is still being shared proportionately among Tenaga, Petronas and the government until 31 August this year.

- The government earlier indicated that the price of gas will be decided by this month. We do not expect further delays as Petronas will have to begin marketing the additional 530mmscfd supply of gas from the Lekas regassification terminal to prospective customers. 

- 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 prices 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 power purchase agreements 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