Tenaga Nasional - Scores Prai plant, no tariff change till June

-  We reiterate our BUY call on Tenaga Nasional (Tenaga), with a higher DCF-derived fair value of RM8.15/share (vs. an earlier RM7.95/share), which implies an FY13F PE of 11x and a P/BV of 1.3x.

-  We maintain FY12F-FY14F net profits as the impact of the lower capacity charge of the new combined cycle gas turbine plant of 1,070MW in Prai will only materialise from 1 March 2016 onwards. But we have raised Tenaga’s DCF by 20 sen to RM8.15/share due to the NPV positive impact from the estimated lower fixed capacity charge.

-  Tenaga has secured the tender to build and own the new Prai power plant, contrary to the Business Times report today that the 1Malaysia Development Bhd-Hyundai Engineering & Construction consortium was likely to be the winner.  Recall that the newspaper reported that 1MDB had submitted the lowest bid for the tender, which included certain clauses and cost parameters which differed from other bids.

-  Additionally, Tenaga has been offered a 5-year extension to generate power from a 275MW block of its 729MW Pasir Gudang combined-cycle gas-fired power plant. This is largely NPV-neutral given that we have already incorporated the continuation of Tenaga’s existing power plants in our forecasts. We estimate that the absence of contribution from the remaining 454MW capacity for the Pasir Gudang plant will be more than offset by the new Prai power plant.

-  The Minister of Energy, Green Technology and Water Datuk Peter Chin said electricity tariff will be maintained until June next year. We view this positively given:- (1) that the pricing mechanism for natural gas has not been announced yet while the Lekas LNG regassification is only expected to commence by December this year, (2) any additional distillate/medium fuel costs arising from the natural gas shortfall below the 1,350mmscfd threshold will continue to be equally shared among Tenaga, Petronas and the government until June next year, and (3) Tenaga continue enjoying lower coal cost, which has fallen to US$83/tonne, 16% below the US$99/tonne (foreign exchange adjusted from US$85/tonne in Feb 2009) in the current tariff structure.

-  Over the longer term, Tenaga will benefit from lower fixed capacity charges due to the upcoming tenders for fresh power plants of 3,400MW capacities other than the Prai plant. Also, the extension of power purchase agreements for Genting Sanyen’s 675MW and Segeri Energy Venture’s 1,303MW power plants will further drive down Tenaga’s fixed cost structure.  

-  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