Tenaga Nasional - Elevated by lower coal costs and stronger demand Buy

- We reiterate our BUY call on Tenaga Nasional (Tenaga), with a higher DCF-derived fair value of RM7.95/share (vs. RM7.35/share previously), which implies an FY13F PE of 12x and a P/BV of 1.2x. 

- We have raised FY12F-FY14F net profits by 6%-10% due to:- (i) Lowering our coal cost assumption from US$110/tonne to US$103/tonne for FY12F and US$90/tonne for FY13F-FY14F, (ii) Raising FY12F power demand growth to 4.5% from 4% previously, and (iii) 2% increase in tariff in FY13F-FY14F in tandem with an increase of RM3/mmbtu (based on the government’s earlier proposed bi-annual increment) for natural gas cost from RM13.70/tonne currently to RM16.70/tonne (near the blended cost of RM17/tonne assuming 150mmscfd from the Lekas regassification terminal at RM42/mmbtu and 1,100mmscfd at the existing price). 

- Excluding forex loss of RM323mil and the RM1,259mil net fuel relief compensation (prior year adjustment) arising from the use of additional distillates and oil, Tenaga’s 9MFY11 core net profit of RM2,255mil came in above expectations, accounting for 76% of our earlier FY12F core net profit of RM2,983mil and 82% of street estimate’s RM2,744mil. 

- Tenaga’s stronger-than-expected earnings largely stemmed from:- (i) 9MFY12 coal costs of US$107/tonne (vs. our and street’s assumption of US$110/tonne), (ii) normalised gas supply, and (iii) 4.4% demand growth for Peninsular Malaysia vs. street’s 4%. We believe street’s estimates were further skewed by the non-inclusion of fuel relief estimates, in which Petronas and the government currently bear 2/3 of Tenaga’s additional oil and distillate costs until 31 August this year.

- We understand further upstream maintenance has lowered gas supply recently (to below 1,000mmscfd vs. Petronas’ commitment to 1,100mmscfd), but this will be largely offset by the cost-sharing mechanism with Petronas and the government. With coal prices falling to US$85/tonne currently, we expect a stronger QoQ growth for 4QFY12 earnings.

- We remain positive on Tenaga due to:- (1) Falling global coal and US-based natural gas prices, which will positively transform the company’s cost structure. A further US$10/tonne decrease in coal cost assumption could raise FY13F net profit by 12%. (2) 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.  (3) 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 FY13F PE of 10x, compared with the stock’s threeyear average band of 10x-16x.

Source: AmeSecurities