Tenaga Nasional - Lower costs to build Prai plant 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 announced that the 1,070MW Prai combined gas-fired power plant is estimated to cost RM2.5bil, over a construction period of 32 months. This cost, which includes a 32-month lease payment for the industrial land, translates into a cost of US$0.8mil/MW – 30% lower than US$1.1/MW for Petronas Gas’ 60%-owned Kimanis combined cycle gas-fired power plant, which has a capacity of 300MW. 

- We understand that the engineering, procurement, construction and commissioning costs for the power plants have become cheaper due to the competitive bidding process and the availability of new technologies and equipment providers.

- The Prai plant will be installed with Siemens’ latest H-Class technology gas turbine with a supercritical, once-through Benson-type Heat Recovery Steam Generator which has a combined-cycle efficiency of greater than 60%, compared with only 50% in the older generation turbines. 

- We are positive that the costs of new plant-ups are being contained via the competitive bidding exercises, which are not favourable for independent power producers. This is because Tenaga, which is the sole off-taker for the electricity generated, is currently allowed to participate in the bids to build new power plants.

- Additionally, the Energy Commission (EC) is planning to open a tender for an additional 3,000MW of capacity under Track-3 early next month. This is positive for Tenaga under an open bidding process as its 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. 

- 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 the 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 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.

- 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 9x, compared with the stock’s threeyear average band of 9x-16x.  

Source: AmeSecurities