Tenaga Nasional - 4Q earnings to improve despite potential Lekas delays Buy

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

- We maintain FY12F-FY14F net profits which assume:- (i) coal cost assumption of US$103/tonne for FY12F and US$90/tonne each for FY13F-FY14F, (ii) FY12F power demand growth of 4.5%, 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/mmbtu currently to RM16.70/mmbtu (near the blended cost of RM17/mmbtu assuming 150mmscfd from the Lekas regassification terminal at RM44/mmbtu and 1,100mmscfd at the existing price). 

- We met up with management today and was reaffirmed that Tenaga’s re-rating prospects remain intact despite a potential technical delay in the commencement of the 530mmscfd Lekas regassification terminal in Malacca towards the end of this month, or possibly in October this year. 

- Until the general election results alleviate tariff rebalancing concerns, near-term catalysts for Tenaga’s re-rating stem from:-

(1) Stronger 4QFY12 earnings, driven by a drop in Newcastle coal cost by 15% QoQ or US$16/tonne and 4% QoQ increase in natural gas supply to 1,000mmscfd. We estimate that a US$10/tonne decrease in our coal cost assumption of US$90/tonne could raise FY13F net profit by 12%.

(2) Tenaga’s stronger earnings outlook will be underpinned by the likely continued cost-sharing formula between Tenaga, Petronas and the government for the additional distillate and oil costs arising from the shortfall in natural gas below the 1,250mmscfd threshold, 

(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. 

- Over the longer term, Tenaga will benefit from lower fixed capacity charges due to the upcoming tenders for new power plants (such as the 1,000-1,300MW Prai combined gas-cycle plant) and the likely extension for over half of the first generation power purchase agreements.

- 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 three-year average band of 10x-16x.  

Source: AmeSecurities