Tenaga Nasional - Bid for 3,000MW is open, unbundling cost under review 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.

- Bernama reported that the Energy Commission (EC) has opened the bidding for two power plants with a combined capacity of 3,000MW, with the closing date for the bidding documents on 4 January 2013. The EC is inviting bidders with identified consortium partners for the pre-qualification selection process. The first 1,000MW power plant will be built on a fast track basis with operation expected to commence in October 2017 while the second 2,000MW plant, which commences operation in 2018/2019, will be built on a new location.

- We are positive on this development as Tenaga appears to be allowed to be one of the bidders.  As mentioned in past reports, Tenaga, which is the sole off-taker of the electricity generated, remains the most likely candidate to build the new power plants as the value proposition for the group does not need to generate a positive net present value- potentially lowering the group’s future cost profile. Recall that Tenaga secured the 1,070MW Prai combined-cycle power plant, which cost an estimated RM2.5bil, in October this year, after out-bidding 1Malaysia Development’s subsidiaries, YTL Power International-Marubeni and MMC Corporation-Mitsubishi.

- On a separate development, Business Times also reported that the EC, Tenaga and the Economic Planning Unit are reviewing how to unbundle Tenaga’s billing system by segregating the group’s cost components – i.e. generation, transmission and distribution. This is positive as consumers’ electricity bills may not move in tandem with some of Tenaga’s cost components such as fuel costs even if tariffs are maintained. But this could mean that industries such as steel companies which consume a higher level of electricity in kWh compared to residential customers may be paying more for the usage.

- We note that coal prices has risen from US$80/tonne last month to US$90/tonne currently due to the winter season, but this is likely to decline early next year given a expectations of softer demand from China. Hence, we maintain Tenaga’s FY13F-FY15F net profits, which assume all-in coal prices at US$90/tonne.

- 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 9x-16x.  

Source: AmeSecurities