- We maintain 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.

- The continuation of the Barisan Nasional-led federal government, following the 13th General Election yesterday, maintains Tenaga’s tariff repricing evolution as the opposition party had called for reviews of power purchase agreements which were signed years ago.

- In our view, an opposition-led government could have resulted in a deadlock on the expected regulatory changes for Tenaga as its incentive-based regulation proposal (which benchmarks KPIs for cost-recovery and reward systems) awaits the government’s approval in August this year. Recall that this system will facilitate the implementation of a long-delayed automatic cost-pass through mechanism for electricity tariffs.

- This will also mean that the fresh 150mmscfd of natural gas from the Lekas regassification plant in Malacca is likely to continue in June as expected, with a new electricity and gas tariff price structure in place.

- With a more stable gas supply, now hovering around 1,100mmscfd (vs. an allocated 1,250mmscfd) for the power sector, coupled with the proposed fuel stabilisation fund, we expect Tenaga’s improving earnings transparency to drive its re-rating process further.

- We also expect Tenaga’s new power plant build-up to be uninterrupted by political uncertainties. The group, together with 1MDB-Mitsui, remains on the short-list for the Project 3A involving a brown-field 1,000MW coal-fired power plant. It is also on the short-list of 5 bidders for Project 3B involving a green-field 2,000MW coal-fired power plant.

- Given that Tenaga’s power grid remains the only off-taker for new power plants, we continue to view the group 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.

- With foreign shareholding currently at 19% as at endMarch this year vs. its peak of 28% back in 2007, the stock still trades at an attractive P/BV of 1.2x – 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