- 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.

- Tenaga confirmed newspaper reports that its whollyowned TNB Repair and Maintenance Sdn Bhd (REMACO) and Kharafi National of Kuwait (Kharafi) has recently signed a 7-year contract valued at KD89mil (RM1bil) with Kuwait’s Ministry of Electricity & Water to operate and maintain Shuaiba North Co-Generation (Power & Distillation) Plant in Kuwait. The contract has started on19 June 2013.

- The co-generation plant, commissioned since 2010, is located within Shuaiba Industrial Authority Area, 40 km from Kuwait City and is able to produce around 780MW of power and 45 Million Imperial Gallons Per Day of distilled water.

- The contract will be executed by a 50:50 Joint Venture between REMACO and Kharafi whereby all financing is equally shared. REMACO is responsible for the operation and maintenance of the power plant while Kharafi is responsible for the operation and maintenance of the distillation plant.

- We are not surprised by this development as its President/CEO Dato’ Ir Azman Mohd had earlier indicated the group’s intention to aggressively pursue non-regulated businesses overseas, especially for REMACO.

- While we are positive on this development, the contribution will only amount to a slight 1% increase to our FY14F earnings, assuming an O&M pre-tax margin of 30%. Hence, we maintain our FY13F-FY15F net profits for now, pending the announcement of Tenaga’s 3QFY13 results on 18 July, which is likely to be within our expectations.

- We expect a stronger sequential 3QFY13 core net profit, driven by lower coal prices as well as higher natural gas supply, which 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 QoQ incremental improvement to the group’s margins.

- 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 1.4x – 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 fair at 3%.

Source: AmeSecurities