- We maintain our BUY call on Tenaga Nasional (Tenaga), with an unchanged DCF-derived fair value of

RM10.45/share, which implies a FY14F PE of 13x and a P/BV of 1.5x.

- The Edge reported over the weekend that the Energy Commission is expected to call for competitive bidding for two gas-fired power plantswith a total capacity of 2,000MW under Track 4A and Track 4B by the end of the year.

- We are not surprised by these new gas-fired power plantups as the Energy Commission needs to continue raising Peninsula Malaysia’s power generation capacity post-2019 as well as maintaining a comfortable mix of fuel-based power generation given that coal-fired power generation will rise from 45% in 9MFY13 to over 60% by 2018 when 5,000MW of new coal-fired capacities has started operations from Janamanjung blocks 4-5, Malakoff’s new Jimah plant and Project 3B.

- The current bidding exercise for Project 3B (involving a greenfield 2,000MW coal-fired power plant) is expected to close on 23 October this year, with the results on the tender being released by the end of the year. As Tenaga maintains its near monopoly status in the transmission and distribution of electricity in Peninsula Malaysia, the group has the natural advantage in any competitive bid, including Track 4A-4B, for new power generation.

- We expect Tenaga’s 4QFY13 results, scheduled to be announced on 31 October, to come in within expectations against a backdrop of stable gas supply and continuing low coal prices (See Chart 4).

- Hence, we maintain our FY13F-FY15F net profits with management reaffirming that the current cost sharing mechanism (2/3 of additional fuel costs at market prices for gas usage above 1,100mmscfd with Petronas and the government) will remain in effect until the government announces the new gas and electricity price structure, which is likely to be earnings neutral for Tenaga.

- While the timing of the new pricing mechanism and the implementation of the proposed fuel stabilisation fund is still unclear at this stage, we expect any impact to be EPSneutral. Nevertheless, as the new incentive-based regulatory initiatives (to be gradually implemented with pre-trial runs this year) facilitate the new tariff setting process, we expect Tenaga’s improving earnings transparency to drive its re-rating process further.

- Foreign shareholding has risen to 22.3% from 15% in the beginning of the year. Nevertheless, 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.

Source: AmeSecurities