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

- We maintain FY13F-FY15F earnings as 1HFY13 core net profit of RM884mil was in-line with our expectations, but ahead of consensus. Tenaga declared an interim dividend of 10 sen/share (vs 5 sen in 1HFY12), also within our expectations.

- Tenaga’s 1HFY13 core net profit accounted for 49% of our FY13F earnings of RM3,858mil, but 53% of street’s RM3,615mil. This strong set of results came in despite a 30% YoY jump in staff cost (+RM375mil) due to higher bonus payments and IFRS provisions for retirement benefits.

- 1HFY13 coal cost declined 22% YoY to US$85/tonne, compared with the spot price of US$88/tonne currently and our FY13FFY15F assumption of US$90/tonne. Hence, there is a strong likelihood for upgrades in consensus forecasts, which we believe incorporate coal costs at US$90-US$100/tonne.

- Tenaga’s 2QFY13 core earnings declined by 13% QoQ due to a 3% seasonal revenue decline coupled with higher staff, fuel and repair & maintenance costs. Distillate and oil expenses fell 85% QoQ, offset by higher coal usage and a 92% QoQ plunge in fuel cost compensation to only RM42mil as natural gas supply rose by 10% to 1,100mmscfd.

- The Energy Commission has shortlisted 5 bidders for Project 3B involving a green-field 2,000MW coal-fired power plant –Tenaga, 1Malaysia Development, Formis Resources-Posco Engineering & Construction, Malakoff-Sumitomo Corp and YTL Power International-Ranhill Power. The final bidders for Project 3A involving a brown-field 1,000MW coal-fired power plant are Tenaga-Marubeni and 1MDB-Mitsui.

- Given that Tenaga’s power grid remains the only off-taker for new power plants, the group remains as the favourite to secure new open tenders and the competitive bids will drive down its fixed power generation costs even if the national utility does not secure the tenders.

- Tenaga will also benefit from easing concerns of an unreasonably high tariff adjustment following the commencement of the 530mmscfd Lekas regassification plant in Malacca by June this year as Petronas has indicated a 15% discount to market prices for the power sector. Coupled with the proposed fuel stabilisation fund and ongoing assessments for implementing the incentives-based regulatory mechanism which will facilitate the new tariff setting process, we expect Tenaga’s improving earnings transparency to drive its re-rating process further.

- While foreign shareholding has risen to 19% by end-March this year from 14% in November last year, the stock still trades at an attractive P/BV of 1.3x – at the lower range of an adjusted 1.1x-2.7x over the past 5 years. Tenaga also offers an attractive FY13F PE of 11x, compared with the stock’s three-year average band of 10x-16x.

Source: AmeSecurities