Tenaga Nasional - Fuel cost pass-through mechanism next year 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 Star reported MyPower Corp CEO Datuk Abdul Razak Majid as saying that the power sector’s fuel cost pass-through mechanism will likely be implemented next year as part of an ongoing industry restructuring process. He said that the likely date for the introduction of the mechanism could be in the coming six to nine months.

- This is not a surprise given that the catalyst for this mechanism, which has been proposed for the many past years, is the expected commencement of the 530mmscfd Lekas regassification terminal (RGT) in 2Q2013. This will introduce natural gas at imported market prices via Petronas Gas’ Peninsular Gas Utilities pipelines. Tenaga currently pays RM13.70/mmbtu for piped natural gas sourced offshore Terengganu to Petronas, which in turn, exports liquefied natural gas at US$16.60/mmbtu  (RM51/mmbtu) to Japan. 

- We understand that 250mmscfd from the Malacca RGT will be allocated to Tenaga, which currently receives around 1,100mmscfd vs Petronas’ commitment of 1,350mmscfd of gas for this year. Currently, Tenaga, Petronas and the  government is equally sharing the additional costs of distillates and oil which have to be used to compensate for the natural gas shortfall in Peninsular Malaysia.

- Recall that the Energy Commission, Tenaga and the Economic Planning Unit are currently reviewing how to unbundle Tenaga’s billing system by segregating the group’s cost components – i.e. generation, transmission and distribution. This is part of the process of introducing the fuel cost-pass through mechanism, so that Tenaga’s tariff structure can be segregated into a fixed capacity charge and a variable component comprising mostly of fuel costs.

- The impending introduction of the pass-through mechanism, which improves Tenaga’s long-term earnings clarity, is a clear re-rating catalyst for the group, which has long suffered from governmental delays in adjusting its tariff to compensate for rising fuel costs.

- 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