- We maintain our BUY call on Tenaga Nasional (Tenaga) with an unchanged DCF-derived fair value of RM14.90/share, which implies a CY14F PE of 16x and a P/BV of 2.4x.

- We maintain Tenaga’s FY14F-FY16F earnings as its 1QFY14 core net profit (excluding forex gains of RM253mil) of RM1,482mil accounted for an impressive 30% of our FY14F net profit of RM4,940mil and 32% of street’s RM4,707mil. Note that this strong result has not factored in the significant impact of a 3.2%-point net tariff increase effective January 1 this year, which could generate incremental earnings of RM550mil over the next 9 months.

- But we caution against excessive optimism as 2QFY14 earnings may be lower sequentially given a 1-month timing mismatch between the hike in gas costs this month vis-a-vis revenue recognition from the electricity tariff increase in February due to meter-reading delay, and tax rate normalisation. Also, amidst a depreciating ringgit, coal prices have risen above US$80/tonne from US$77/tonne in 1QFY14.

- The analyst briefing yesterday clarified that Tenaga’s liquefied natural gas (LNG) costs, which involve a volume of ~300mmscfd, will reflect Petronas’ market prices. But note that the electricity tariff’s embedded LNG price assumption is fixed at RM41.68/mmbtu, which will be reviewed bi-annually in June and December with the Cabinet’s approval still required for any adjustment in tariffs.

- Currently, actual gas cost is slightly higher at RM45/mmbtu- which could translate to an additional estimated charge of RM260mil for 6 months. But this may be offset by lower actual coal costs vs. US$87.50/tonne assumed in the new tariff structure.

- Tenaga’s 1QFY14 core net profit rose by 77% QoQ largely due to an 8.5% decline in coal costs to US$77/tonne, absence of an estimated RM300mil cost provisions in 4QFY13, and write-back of deferred tax provisions due to a 1%-point cut in corporate tax rate to 24%.

- This was partly offset by higher LNG gas cost, which is now shared 50:50 with Petronas instead of the 1/3 incremental cost from gas volume supplied over 1,000mmscfd. This includes additional RM130mil LNG costs from previous quarters.

- We remain convinced that Tenaga’s earnings revision cycle from the tariff hike, commencing this month, will continue to propel its re-rating focus forward. The stock trades at a decent P/BV of 1.8x, within the adjusted 1.1x-2.0x 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.

- Foreign shareholding has risen to 27.8% currently, near its peak of 28% back in April 2007. But this is not a concern as there is currently no limitation on foreign shareholding levels.

Source: AmeSecurities