Tenaga Nasional - Changing landscape favours Tenaga vs IPPs BUY

- We reiterate our BUY call on Tenaga Nasional (Tenaga), with an unchanged DCF-derived fair value of RM8.15/share, which implies an FY13F PE of 11x and a P/BV of 1.3x.

- We expect Tenaga’s FY12 core net profit, which will be announced on 31 October 2012, to be above our expectations, which in turn are 9% above street estimates. For now, we maintain FY12F-FY14F net profits. 

- We expect the group’s 4QFY12 core net profit to increase by 20% QoQ to RM1.4bil, largely due to:- (1) an estimated 13% decrease in coal costs to  around US$90/tonne, and (2) 4% improvement in natural gas supply to 1,000mmscfd from 960mmscfd in 3QFY12. Note that we have not incorporated any one-off provisions from the RM113mil legal claim by Irham Niaga in our forecasts. 

- The recently-announced levelised tariff of 34.7 sen/KWh (assuming natural gas price at RM44/mmbtu) for Tenaga’s 1,070MW combined-cycle Prai power plant is a transformative precursor for future power purchase agreements (PPA). Assuming natural gas price remains at RM13.70/mmbtu, we estimate that Prai’s electricity  tariff could be around 16 sen/kWh – 43% below Genting Sanyen’s current rate of 28 sen/KWh.

- While only 49% of the Gen-1 PPAs have been extended for another 10 years, the recent press interview of the Energy Commission’s chairman, Tajuddin Ali, indicated the possibility of another round of Gen-1 PPA-extending tenders.

- The new lower capacity payments will begin immediately for Genting Sanyen’s 720MW plant and June next year for MMC Corp’s 1,303MW Segeri Energy Ventures. But we understand that Tenaga will not benefit from the lower capacity charge as any savings from the lower tariffs of Gen-1 PPA extensions will be channelled to a RM5bil fuel stabilisation fund, which be used to temporarily ease the sector’s fixed tariff regime to a flexible market-driven structure. 

- While we do not expect any radical improvement in natural gas supply to the power sector, the continued cost-sharing mechanism with Petronas and the government for additional distillate and medium fuel will continue to support Tenaga’s new-term earnings prospects. Although Petronas has indicated that the Lekas regassification terminal in Malacca will begin operations by the end of the year, we expect further postponements given that the Minister of Energy, Green Technology and Water Datuk Peter Chin has said electricity tariff will be maintained until June next year.

- All in, we continue to like Tenaga as the upcoming  new power plant capacities and tariff restructuring policies will support the stock’s re-rating cycle. The stock currently trades at a P/BV of 1.1x, 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: AmseSecurities