- 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.

- Excluding forex gains of 494mil, Tenaga’s FY13 core net profit of RM4,120mil came in within expectations. Hence, we maintain FY14F-FY15F earnings which assume electricity demand growth at 4% and coal costs at US$85/tonne. We have also introduced FY16F earnings with a growth of 6% assuming that demand growth remains flat at 4%.

- Excluding prior year’s fuel cost compensation, Tenaga’s FY13 core net profit rose by 22% YoY largely due to higher electricity sales and a 19% decline in coal costs to US$84/tonne.

- Tenaga’s 4QFY13 demand growth was flat QoQ at 3%, leading to an overall FY13 growth of 3.8% vs. our assumption of 4%. As management expects a stronger demand growth next year on the back of improving economic outlook, we maintain our forecasts.

- As coal costs fell by 4% QoQ to US$81/tonne, Tenaga’s 4QFY14 core earnings should have been stronger. But yearend provisions for accrued revenue, staff costs, repair & maintenance coupled with higher gas costs led to 4QFY14 core earnings decreasing by 40% QoQ to RM837mil.

- Although the government has not made any decision yet on electricity tariffs or gas costs, Tenaga has made provisions for the additional gas from the Melaka regassification plant. The group assumed the continuation of the 2/3 cost-sharing mechanism for the additional gas supply above 1,000mmscfd since June this year.

- In 4QFY13, Tenaga had provided RM349mil for the additional gas, assuming the market price at RM43/mmbtu, and it was charged 1/3 of the incremental cost above RM13.70/mmbtu.

- The analyst briefing did not shed further light on the timing of the new pricing mechanism nor the implementation of the proposed fuel stabilisation fund. But the new incentive-based regulatory initiatives (to be gradually implemented) are expected to facilitate the new tariff setting process. Hence, we continue to expect Tenaga’s improving earnings transparency to drive its re-rating process further.

- Foreign investors have helped fuel the upward trend of the share price, as foreign shareholding has risen to 26.6% from 15% in the beginning of the year.

- The stock trades at a fair P/BV of 1.5x, 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 12x, compared with the stock’s three-year average band of 10x-16x.

Source: AmeSecurities