Tenaga Nasional - JDA for proposed undersea cable to Sumatra 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.

- Tenaga has entered into a Joint Development Agreement (JDA) with Indonesia’s state-owned utility  PT PLN and PT Bukit Asam (Bukit Assam) to develop a coal-fired power plant, coal mine and HVDC interconnection line linking Telok Gong in Melaka to Garuda Sakti in Sumatera, Indonesia.

- This JDA is a follow-up to the Memorandum of Understanding with PT PLN and Bukit Asam in June this year. Tenaga will lead in the development of the undersea cable project while PT PLN will develop the coal-fired power plant. Bukit Assam, primarily involved in coal mining and a holder of the production operation mining permit in Indonesia, will develop a mine mouth coal fired power plant in Peranap, which is 250 km south east of Pekanbaru, Sumatera. 

- We understand that the undersea line will transmit electricity between the power grids in Peninsular Malaysia and Sumatra, not only energy generated from the proposed coalfired power plant. This development is not a surprise as it forms part of the proposed ASEAN power grid linking Cambodia, Vietnam, Laos, Thailand, Malaysia, Singapore, Brunei and Indonesia. 

- We also understand that this power plant, which will likely be a conventional plant, could have an initial capacity of 1,000MW. But as this plant will be using low-grade coal from the coal mine, it may cost lower than Tenaga’s RM5bil new 1,000MW block in Janamanjung, Perak. 

- The cost and equity stakes for the power plant, coal mine and undersea transmission line are still under evaluation. But we understand that Tenaga and PLN will equally share in the majority stake in the power plant, with Bukit Assam owning the minority. For the coal mine, in which Bukit Assam will have the majority stake, Tenaga and PLN will be minority stake holders. 

- We view this development positively as the consumption profile in Sumatra, which tends to use more electricity at night vs. day time, complements Peninsular Malaysia and leads to a more efficient usage of resources. As the distance is also shorter than the earlier proposed undersea cable to the Bakun dam in Sarawak, the potentially lower cost of the transmission line improves the project feasibility. But as this is a long-term development, we maintain FY12F-FY14F net profits.

- 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: AmeSecurities