- 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, which will not be affected by additional payments for renewable energy (RE).

- Tenaga has signed a 25-year power purchase agreement to buy electricity from 1Malaysia Development’s proposed 50MW solar photovoltaic plant in Kedah, after direct negotiations between the Energy, Green Technology and Water Ministry, Energy Commission and Sustainable Energy Development Authority Malaysia (SEDA).

- The size of the plant is above the maximum 30MW capacity under SEDA’s feed-in tariff rate structure, which needed special approval from the Minister of Energy, Green Technology and Water.

- This is part of the country’s plan for RE, which includes biogas, biomass, solar and small hydro projects, to reach a 5% electricity generation target or an estimated 1,087MW for Peninsular Malaysia. SEDA’s website lists RE plants of 184MW (out of which 59% are solar plants, 23% biomass and 6% small hydro) currently in operation, with another 246MW expected to be completed by 2016.

- The Star has reported that 1MDB’s RE tariff rates are between 40 sen/kWh and 46 sen/kWh, higher than Tenaga’s recently revised electricity tariff of 40 sen currently. Due to annual degression rates, this is much lower than the first generation of applicants back in January 2012 which secured tariff rates of up to 95 sen/kWh for 1MW-10MW plants.

- But Tenaga currently collects 1.6% of all electricity bills for SEDA’s renewable fund which is used to pay for these RE generation costs. Hence, the higher costs of RE compared to gas or coal is not borne by Tenaga.

- For Tenaga’s 2HFY14 results, scheduled to be released on 24 April, we expect a sequentially weak 2QFY14 due to normalisation of tax rates and a 1-month timing delay between the increase in gas costs in January this year vs. recognition of tariff rate hike in February, as already forewarned in 24 January this year. While coal prices has fallen to US$73/tonne (See Chart 1) vs. Tenaga’s tariff of US$87.50/tonne, the impact is likely to be felt next quarter due to a 3-month time-lag in transportation.

- 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 decent CY14F PE of 13x, compared with the stock’s 3-year average band of 10x-16x.

Source: AmeSecurities