- 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 Tenaga’s FY13F-FY15F earnings on expectation that its 3QFY13 results, expected to be announced on 18 July, are likely to come in within our forecasts. Note that our forecasts are 4%-9% higher that general consensus.

- We expect a stronger sequential 3QFY13 core net profit, excluding likely unrealised forex losses from a stronger US$, as Tenaga’s natural gas supply has risen by 15% QoQ to an average 1,269mmscfd in 3QFY13, based on data from the Energy Commission. As this translates to a higher mix of lower priced gas vs. oil & distillates, we expect incremental improvement to the group’s margins.

- Since the end of 3QFY13, Tenaga’s natural gas supply has further risen by 8% to reach an average of 1,368 mmscfd for the first half of June this year, including the year’s peak of 1,549 mmscd.

- We believe that the increased gas volume may be coming from the Lekas LNG regassification plant in Malacca, which was recently commissioned on 28 May this year, even though the new gas and electricity tariff has not been announced by the government. As noted in our past reports, our estimates assume that there will be neutral earnings impact from the tariff rebalancing exercise.

- Additionally, average Newcastle coal prices have decreased by 4% QoQ to US$88/tonne in 3QFY13 – which will further add an estimated RM50mil to the group’s quarterly earnings. Since the end of May this year, coal prices have further declined by 12% to US$78/tonne. We estimate that a US$10/tonne reduction in our FY14F coal cost assumption to US$80/tonne could raise Tenaga’searnings by 13%.

- We expect further positive newsflow for Tenaga, as it is tipped to secure the tender for 1,000MW brownfield coalfired power plant, edging out the only other bidder 1Malaysia Development Bhd. Recall that Tenaga, together with its partner Marubeni Corp from Japan put in the lowest bid of 22.78 sen/kWh.

- With foreign shareholding at 19% as at end-March this year vs. its peak of 28% back in 2007, the stock still trades at an attractive P/BV of 1.4x – at the lower range of an adjusted 1.1x-2.7x over the past 5 years. Tenaga also offers an attractive FY14F PE of 11x, compared with the stock’s three-year average band of 10x-16x. Dividend yields are also reasonable at 3%.

Source: AmeSecurities