- We maintain our BUY call on Tenaga Nasional (Tenaga) with a higher DCF-derived fair value of RM13.10/share (vs.RM10.45/share earlier), which implies a CY14F PE of 14x and a P/BV of 2.1x.

- We have raised Tenaga’s FY14F-FY16F earnings by 11%-17% largely due to the net tariff increase of 3%, arising from the hikes in electricity and natural gas prices. The net increase stems from the 2.7% increase from base tariff plus another 0.5% from the higher US$87.5/tonne (+3%) coal price embedded in the new tariff structure. We may fine-tune our forecasts pending an analyst briefing this Friday.

- Our coal cost assumptions are maintained at US$85/tonne, as Newcastle coal prices are still currently below this level. We expect prices, which has rallied by 10% since September this year, to level off after the winter season together with the completion of contract negotiations between coal mines and buyers.

- Recall that electricity rates will be raised in Peninsular Malaysia (+14.9%) and Sabah (+16.9%) effective 1 January 2014, but this will be largely offset by an 11% increase in domestic natural gas price to RM15.20/mmbtu and imported liquefied natural gas price at RM42/mmbtu.

- We understand that the 6-month tariff review structure will still be largely intact even after the implementation of the group’s incentive-based regulatory measures, which has eased the regulatory process between the Energy Commission and Cabinet.

- The automatic cost-pass through mechanism, which was much discussed in the past, is unlikely to become a reality in the near future given the significant social impact under the current policy trend to reduce subsidies.

- The new tariffs for Sabah Electricity (SESB), at 34.5 sen/kWh is still 4 sen below Peninsula’s 38.5 sen/kWh, but higher revenue could raise Tenaga’s earnings further by RM200mil as fuel subsidies will be maintained by the government.

- For now, we assume a neutral earnings impact from SESB as costs may escalate from the ramping up of capex rollouts to ensure a wider distribution network and stable electricity supply in Sabah.

- The earnings revision cycle from the tariff hike, commencing next month, will continue to propel the rerating focus for the group. The stock trades at a decent P/BV of 1.8x, which is at the mid-range of adjusted 1.1x-2.7x over the past 5 years. Tenaga also offers a fair CY14F PE of 12x, compared with the stock’s 3-year average band of 10x-16x.

Source: AmeSecurities