- 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.

- Business Times reported today that MyPower Corp chief executive officer Datuk Abdul Razak Abdul Majid said that its proposal to the Cabinet involves the raising of electricity tariffs by 25% for heavy industrial users such as steelmakers and glove manufacturers.

- But commercial users such as retailers and enterprises will face lower tariff increases while those consuming less than 200kWh will not experience any tariff changes.

- The government will also look into proposals from Petronas, Tenaga, Energy Commission and other parties before making a decision, possibly by January-March 2014.

- Currently, the average tariff for industrial users is 32.2 sen/kWh, while commercial is 42 sen/kWh and residential is 29.7 sen/kWh. Hence, the industrial tariff, which was originally set at a lower rate to promote the country’s industrialisation, is already currently 24% below the commercial segment.

- Hence, it is not surprising that if subsidies were to be gradually removed, industrial users could face the main brunt of any fuel cost increase.

- Based on our own sensitivity analysis, if 250mmscfd of natural gas above 1,000mmscfd was to be priced at RM43/mmbtu (above the current price of RM13.70/mmbtu), we estimate that Tenaga’s average tariffs could rise by 8.5%.

- If the Energy Commission allowed Tenaga to use the capacity charge savings of around RM300mil annually from the 10-year power purchase agreement extension of 675MW Genting Sanyen, 1,303MW Segari Energy Ventures and Tenaga’s own 275MW Pasir Gudang plant, the average tariff increase could be slightly reduced to 7.7%. Recall that these savings, which started in March this year, were earmarked for a fuel subsidy stabilisation fund to offset the increase in energy costs.

- But based on our estimated average tariff increase of 8.5% and if industrial users’ rates were raised by 25% as indicated by Razak, this means that the tariffs for commercial and residential users will be largely unchanged. For now, we maintain our FY14F-FY15F earnings pending further announcements by the government.

- The stock trades at an attractive 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.