- We reiterate our BUY call on Tenaga Nasional (Tenaga), with a higher DCF-derived fair value of RM9.15/share (vs. RM8.15/share earlier), which implies an FY14F PE of 12x and a P/BV of 1.5x.

- We maintain FY13F earnings, but have raised FY14F-FY15F net profits by 3%-6% on a 19% reduction in average natural gas cost from RM20/mmbtu to RM16.50/mmbtu, which is largely offset by a corresponding 3ppt-reduction in our electricity tariff increase to 3%.

- Our FY13F-FY15F net profits are 11%-14% above street estimates, likely due to lower coal cost assumptions. But we expect Tenaga’s 1HFY13 results, which will be announced on the 19th of this month, to be within our expectations given that natural gas supply has improved while coal prices has fallen from over US$90/tonne to US$88/tonne currently.

- Tenaga’s share price ran up 37 sen (+5%) yesterday on a rampant liquidity rally fuelled partly by foreign buying activities. Regardless, we believe that this is the start of an extended upward re-rating cycle, underpinned by the national utility’s solid fundamentals and following catalysts:-

1) Easing concerns over the impact of the hike in natural gas costs as the price of LNG from Bintulu, Sarawak, to the Lekas regassification terminal (RGT) in Malacca will be at a discount of 15% to market and the cost of piped gas for 1,100mmscfd will be unchanged.

2) Improving natural gas supply, from below 1,000mmscfd last year to 1,100mmscfd, which reduces the need to use more costly distillate and medium fuels. This will be boosted by additional natural gas supply from the commencement of the RGT, which is expected to supply an additional 150mmscfd to the power sector by June this year.

3) Coal prices have declined by 6% from US$93/tonne in early February this year to US$88/tonne currently vs. our FY13F-FY15F assumption of US$90/tonne. Note that a US$10/tonne reduction in coal cost from our assumption will raise FY14F earnings by 12%.

4) Upcoming results of competitive coal-fired power plant tenders for Track 3A (1,000MW) in August this year and Track 3B (2,000MW) likely by early 2014, with Tenaga likely to benefit from lower generation costs even if it does not secure the bids.

5) Foreign shareholding currently at a low of 14% vs. the peak of 26% back in August 2007. The return of foreign buying activities could redirect local institutions to the stock.

- Even after the share price lift yesterday, the stock still trades at a P/BV of 1.3x, at the lower end of the 1x-2.6x range over the past 5 years.

Source: AmeSecurities