Tenaga Nasional - 3,000MW tenders next month 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.

- The Edge reported that the Energy Commission (EC) is planning to open a tender for an additional 3,000MW of capacity under Track-3 in early December this year, following the award of the 1,070MW Prai combined gas-fired power plant to Tenaga last month. 

- Assuming an average plant cost of US$1.5mil/MW, this could mean that the total cost of the plants could reach RM14bil. If Tenaga secures all of this capacity, its current net gearing of 0.4x could reach 0.8x. But this is still significantly below its 2003-peak of 2x, which did not significantly affect its creditrating back then.

- We expect the group to secure most of its funding via local borrowings, given that the domestic bond market has grown much larger over the past 20 years.

- We are positive on the upcoming plant-up programme under an open bidding process as Tenaga’s fixed-cost structure is likely to decrease if a higher proportion of power generation shifts from the independent power producers (IPPs)  to Tenaga. Currently, half of Peninsular Malaysia’s power generation is estimated to be owned or significantly-owned by IPPs. 

- We maintain FY13F-FY15F earnings given that the impact of new power plant capacities are likely to be felt only beyond FY16F as the construction period usually encompasses 3-4 years.

- But the IPPs have also complained about the competitiveness of the bidding process given that Tenaga – which owns the transmission and distribution grid and is the sole off-taker for the electricity generated in Peninsular Malaysia – was also allowed to participate in the recent tender. This could affect their teaming up with foreign partners in future tenders unless Tenaga confirms its non-participation. 

- In our view, Tenaga is likely to continue to be allowed to bid in the tender process as it is the EC’s strategy to generate greater efficiencies and drive down the costs of electricity generation. If the IPPs refuse to participate in the tenders, Tenaga will secure the additional plant capacities by default. Hence, we expect the EC’s policies to remain favourable towards Tenaga.

- As such, we continue to like Tenaga as the upcoming new power plant capacities and ongoing tariff restructuring newsflow will underpin the stock’s re-rating cycle. 

- The stock currently trades at a P/BV of 1.1x, at the lower end of the 1x-2.6x range over the past 5 years. Tenaga also offers an attractive FY13F PE of 10x, compared with the stock’s three-year average band of 10x-16x.

Source: AmeSecurities