Tenaga Nasional - Lower coal costs, upcoming regulatory incentives 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 maintain FY13F-FY15F earnings as 1QFY13 core net profit of RM1,018mil was in line with our expectations, but ahead of consensus. Tenaga did not declare any interim dividend, as expected.

- Tenaga’s 1QFY13 core net profit was 26% of our FY13F earnings of RM3,875mil, but 31% of street’s RM3,261mil. We expect subsequent quarters to be slightly weaker as coal prices have risen to over US$90/tonne currently from US$84/tonne in 1QFY13. Our forecast assumption is at US$90/tonne for FY13FFY15F. But this could be partly offset by an appreciating ringgit vs. the US$, coupled with stronger electricity demand growth which came in at only 3.4% YoY vs. our FY13F assumption of 4%.

- Tenaga’s 1QFY13 core earnings rose by 11% QoQ despite a 2% revenue contraction on a seasonally weaker electricity consumption. This stemmed from the 11% QoQ decline in coal costs which fell to RM259/tonne (US$84/tonne).  

- In our view, Tenaga’s near-term earnings have become more visible given that the current cost-sharing mechanism for additional distillates and medium fuel oil arising from natural gas shortages will continue to be shared with Petronas and the government until commencement of the Lekas regassification terminal (RGT) in Malacca, which is expected to be in 2Q2013 and after the general election. 

- The ongoing structural changes to Tenaga will continue to positively support its earnings. The group has submitted its incentive-based regulation proposal, targeted to be approved by the government in August this year and commencing in 2015. This mechanism establishes cost recovery procedures and rewards based on KPI performance.

- The Energy Commission has called for qualifying bids for the fast-tracked 1,000MW supercritical coal-fired power plant which is expected to be operational in October 2017. Two more greenfield coal fired power plants with capacities of 2 x 1,000MW will be expected to commence in October 2018 and April 2019.

- Given that Tenaga’s power grid remains the only off-taker for new power plants, the group remains the favourite to secure new open tenders and on track to further drive down its fixed power generation costs. Hence, 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.

- Tenaga’s book value declined 5% QoQ to RM6.02/share due to the revaluation of employee benefits arising from adoption of MFRS 119. Hence, the stock currently trades at a slightly higher P/BV of 1.2x, but still at the lower range of an adjusted 1.1x-2.7x 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