Tenaga Nasional - Appealing RM113mil legal damages 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. 

- Tenaga is appealing to the Court of Appeal against  the Kuala Lumpur High Court’s decision to  award RM113mil in legal damages, interest cost to the plaintiffs – Irham Niaga Sdn Bhd and Irham Niaga Logistics Sdn Bhd.

- This long-running legal suit commenced in 2004 due to a warehousing dispute in 2001-2005 between the plaintiffs and Tenaga’s wholly-owned TNB Transmission Network Sdn Bhd (TTN). An arbitration tribunal favoured the plaintiff’s claim in October 2007, but Tenaga appealed to the High Court with the defence that Tenaga was not involved in TTN’s negotiations.

- We understand that this legal claim is a contingent liability but not provided for in Tenaga’s accounts. While this suit could continue to be a long-drawn out process, there is a strong possibility that the awarded sum – which translates into a slight 3% of Tenaga’s FY13F net profit - could be provided for in the near future.  

- 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; (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; and (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 gascycle 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