- 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 Star reported today that Energy, Green Technology and Water Minister Datuk Seri Dr Maximus Ongkili as saying that consumers should brace themselves for a 10%-20% hike in electricity tariffs anytime next year.

- Based on the current average tariff rate of 33.5 sen/kWh, this could mean that electricity rates could rise to 36.85sen/kWh-40.2 sen/kWh.

- This rate hike seems to be above our own estimates of an average hike of 8.5%, assuming that the tariff increase is sufficient to offset the cost increase to RM43/mmbtu (from the current price of RM13.70/mmbtu) for 250mmscfd of natural gas purchased above 1,000mmscfd.

- If the tariff increase is 1ppt above our 8.5% estimates, Tenaga’s FY15F earnings will increase by 6%, and our DCF value could rise by 13% to RM11.76/share.

- In our view, the tariff adjustments may exclude the lowincome population while the middle-income group may be less affected than heavy users of electricity such as industrial and commercial segments.

- Recall that MyPower Corp chief executive officer Datuk Abdul Razak Abdul Majid said last week 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 Datuk Razak also said that commercial users such as retailers and enterprises will face lower tariff increases while those consuming less than 200kWh will not experience any tariff changes.

- 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, if subsidies were to be gradually removed, industrial users could face the major brunt of any fuel cost increase. 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.

Source: AmeSecurities