Tenaga Nasional - Tariff hike may not be asa high as expected 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 Petroliam Nasional’s (Petronas) president Tan Sri Shamsul Azhar Abbas as saying that a 3.6 million tonne reserve in Sarawak has been earmarked for the supply of natural gas to the 530mmsfd Malacca liquefied natural gas (LNG) regassification terminal (RGT) at a discount to export prices while existing supply contracts will remain at the current regulated subsidised prices. Japan currently pays US$17.12/mmbtu for LNG from Malaysia.

- The report added that the current supply will continue to be paid at RM13.70/mmbtu by the power sector and 18.35/mmbtu by industrial users while the additional gas to the Malacca RGT will be at a 15% discount to the power sector and 10% discount to industrial users. Recall that Tenaga is currently only being supplied 1,000mmscfd-1,100mmscfd of natural gas vs. Petronas’ commitment of 1,350mmsfd this year due to the natural gas shortage in peninsular Malaysia.

- Assuming that natural gas, which is currently being supplied at 1,100mmbtu, to the power sector remains at the current rate of RM13.70/mmbut and the additional 250mmbtu at RM54/mmbtu (20% premium for regassification and transportation costs, which largely offset the 15% discount from Petronas), we estimate that natural gas costs will only rise by 31% to RM18/mmbtu in June this year vis-à-vis our estimate of a 50% increase to RM20.50/mmbtu.

- This is a positive development, which means that Tenaga’s electricity tariff will only need to rise by 4% vs. our expectation of 8.5% to offset the corresponding increase in gas costs. As a comparison, the last electricity tariff increase was at an average of 7.1% in June 2011. Hence, we believe that the upcoming tariff hike will be more acceptable to consumers. For now, we maintain our FY13F-FY15F earnings pending an official announcement from the government.

- 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 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 9x-16x.

Source: AmeSecurities