- 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 Petroliam Nasional’s president/CEO Tan Sri Shamsul Azhar Abbas said that the power sector will have a 2-tiered gas pricing mechanism. For the first 1,000mmscfd, the gas price will remain at the subsidised price of RM13.70/mmbtu.

- For additional gas supply above 1,000mmscfd, the gas price will be set at a 15% discount to Malaysia’s liquefied natural gas (LNG) price on a weighted average basis (free on board) plus all associated delivery costs.

- Assuming that the delivery costs of the additional gas adds 20% to Malaysia’s LNG export price of US$17.22/mmbtu to Japan, we estimate that an additional gas supply of 250mmscfd above the 1,000mmscfd threshold will raise Tenaga’s average gas costs by 4.7x to RM65/mmbtu from RM13.70/mmbtu currently.

- To fully offset the impact of this estimated gas price increase, we estimate that Tenaga’s average tariff will need to be raised by 14.9% to 38.5 sen/kWh.

- As a comparison, the last time that Tenaga’s tariff was revised was back in June 2011, involving a 7.1% hike. But further back in June 2008, electricity prices was raised even higher by 24% due to surging coal costs (see Table 1).

- This news is not a surprise as Tan Sri Azhar has indicated that a 2-tier pricing mechanism will be introduced since the Melaka regassification terminal started operation on 28 May this year.

- Nevertheless, our channel checks indicate that Tenaga is still paying gas costs at RM13.70/mmbtu with supply averaging around 1,300mmscfd currently.

- Hence, we maintain our FY13F-FY15F net profits for now 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 officially announces the new gas and electricity price structure.

- We also maintain our view that any changes to gas costs will lead to an earnings-neutral adjustment in electricity tariffs for Tenaga.

- The stock trades at an attractive P/BV of 1.4x, which is 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