- 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.

- We are positive on Tenaga’s exit from the tender exercise to acquire Bord Gais Energy, the retail and power division of Ireland’s Bord Gáis Éireann. Bord Gáis Éireann is the main supplier and distributor of pipeline natural gas currently on a fully regulated basis in Ireland. It also supplies electricity and owns 15% of Ireland’s installed wind farms.

- Reports have indicated that the sale of Bord Gais Energy could fetch a price of between EUR1bil (RM4.3bil) and EUR1.5bil (RM6.5bil). The remaining bids for Bord Gais Energy are from a group led by Viridian Group Ltd and Macquarie Group Ltd and from Centrica Plc.

- Assuming the Bord Gais Energy’s acquisition price works out to RM6bil, we estimate that Tenaga’s net gearing could rise from 0.3x in FY14F to 0.5x.

- Tenaga’s chief financial officer Fazlur Rahman Zainuddin said that the group had submitted a non-binding offer for Bord Gais Energy to reduce its reliance on regulated business in Malaysia. But we are positive on Tenaga not going ahead with the tender given the impact to the group’s earnings against the backdrop of its significant capex plans over the next 3-5 years.

- Recall that the group is currently building 1,000MW of coalfired power plant in Janamanjung by 2015 as well as another 1,000MW block expected in 2017, involving a total capex of RM10bil. 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 the 2,000MW gas-fired Track 4A-4B power plants.

- 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.

- The stock 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