Tenaga Nasional - Build-own-operate JV for Bangadesh coal-fired plant 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. 

- The Star reported that Tenaga has been selected by the Bangladesh Power Division (BPD) to install and operate a 1,320MW coal-fired plant via a joint-venture with Bangladesh’s Power Development Board. The location of the plant could be in Anwara in Chittagong or Maheshkhali at Cox’s Bazar. A delegation from BPD will finalise the memorandum of understanding later this month.

- Bangladesh has initiated three coal-fired power projects, each with a capacity of 1,320MW in joint-ventures with three state-run-agencies. Bangladesh’s government preferred Tenaga’s proposal over bids by Chinese and Thai power generation companies, which wanted to secure engineering, procurement and construction contracts for themselves. Tenaga’s proposal, which involve an open tender, will be undertaken on a build-ownoperate basis. 

- Based on the 1,000MW extensions for Tenaga’s Janamanjung coal-fired power plant and Malakoff’s Tanjung Bin expansion, we estimate that the Bangadesh power plant could easily cost RM6.6bil. But assuming an 80:20 debt to equity ratio and a 50% equity stake, we expect a slight 5% increase to Tenaga’s current net debt of RM14bil or net gearing of 0.4x.

- We understand that Tenaga’s equity IRR for such projects could be 8%-9%, which translate into a marginal impact on the group’s DCF. But the group is looking for a much stronger growth in its operation & maintenance earnings, under its wholly-owned REMACO, which contributed FY11 revenue of RM500mil, as part of the group’s strategy under its new president/CEO Dato’ IR Azman Mohd. 

- The group has targeted an aggressive non-regulated revenue target of RM5bil for FY15F from RM1.8bil in FY11, representing a compounded growth of 29% vs. Peninsular Malaysia’s projected electricity demand growth of 4%. But any impact on the group’s earnings prospects will likely to be incremental over the longer term. Hence, we maintain FY12F-FY14F net profits. 

- 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