Tenaga Nasional - Bolstered by strong regulatory winds 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 have fine-tuned FY13F-FY14F earnings which are still based on:- (i) coal cost assumption of US$90/tonne, (ii) power demand growth of 4%, and (iii) 2% increase in tariff in FY13F-FY14F in tandem with an increase of RM3/mmbtu (based on the government’s earlier proposed bi-annual increment) for natural gas cost from RM13.70/tonne currently to RM16.70/tonne.  We also introduce FY15F earnings with a stable growth  of 6% underpinned by a 4% increase in electricity demand.

- Excluding forex loss of RM231mil and the RM1,259mil net fuel relief compensation (prior year adjustment for FY11) arising from the use of additional distillates and oil, Tenaga’s FY12 core net profit of RM3,170mil came in within our forecast, but 13% above street estimate’s RM2,805mil. 

- But there were year-end provisions of RM278mil, which include the legal claim by Irham Niaga amounting to RM161mil warehousing losses in 4QFY12. Also, there was a mismatch between the fuel compensation claim from Petronas and the government which decreased 25% QoQ while distillate and oil costs increased 8%. If these were excluded, Tenaga’s 4QFY14 core net profit could have reached RM1.3bil, as indicated in our report on 18 Oct.

- Tenaga’s 4QFY12 core earnings rose by a flat 4% QoQ to RM915mil as the 12% decrease in coal cost to US$92/tonne and 4% decrease in coal consumption to 5.3mil tonnes were largely offset by the year-end provisions and 25% decrease  in fuel compensation claims for the use of distillates. 

- We understand that the lower fuel compensation claims could have stemmed from Tenaga’s power generation mix and plant down-time which were not caused by the natural gas shortfall. Natural gas supply improved to 1,000mmscfd in 4QFY12 from 960mmscfd in the previous quarter. 

- Tenaga indicated that the Lekas regassification terminal (RGT) in Malacca could commence in 1Q2013, but we remain cautious given that  the Minister of Energy, Green Technology and Water Datuk Peter Chin said electricity tariff will be maintained until June next year. Even if technical and engineering issues of the RGT are sorted out, it is unlikely that Petronas will agree to sell natural gas below the market price of LNG unless the pricing mechanism is in place. 

- As such, our forecasts assume that Petronas and the government currently bear 2/3 of Tenaga’s additional oil and distillate costs until the RGT restores the natural gas supply to the normal 1,350mmscfd threshold.

- 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 range of 1x-2.6x 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