- We maintain our BUY call on Tenaga Nasional (Tenaga) with a higher DCF-derived fair value of RM15.00/share (vs. RM14.90/share previously), which implies an FY15F PE of 14x and a P/BV of 2.2x.

- We have raised Tenaga’s FY14F earnings by 30% largely due to the significant positive tax charge arising from the reversal of deferred tax provisions. This stemmed from reinvestment allowances not recognised in FY13 as well as future reinvestment allowances (RM76mil in 2QFY14) from the group’s capital expenditure programme, as management is now claiming these incentives under plant & equipment in the manufacturing category.

- But our forecasts for FY15F-FY16F are largely unchanged as the lower tax rate assumptions of 19% (from 23% earlier) are mostly offset by the group’s higher LNG costs of RM45/mmbtu vs. the new tariff structure’s fixed RM41.68/mmbtu.

- Tenaga’s 1HFY14 core net profit (excluding forex gains of RM134mil) of RM3,271mil came in way above expectations, accounting for 66% of our earlier FY14F net profit ofRM4,940mil and 67% of street’s RM4,889mil. But this stemmed largely from the group’s reinvestment allowances of RM662mil and over-provision of RM189mil due to the 1%-point change in corporate tax rate to 24%. But Tenaga maintained its interim dividend at 10 sen/share.

- Likewise, Tenaga’s 2QFY14 core net profit rose by 21% QoQ to RM1,789mil largely due to these reinvestment allowances. But normalising these tax rates, we note that Tenaga’s 2QFY14 core net profit still rose by 9% QoQ largely due to the impact of the 3%-point net tariff increase effective mid-January this year and cessation of bearing 1/3 of the liquefied natural gas costs (LNG) until December 2013. This was partly offset by the ½ month timing difference between the electricity tariff and gas cost hikes in January 2014, which resulted in additional fuel costs estimated at RM140mil.

- Recall that Tenaga, Petronas and the government were still equally bearing LNG costs until the new tariff structure took effect in January 2014.

- We remain convinced that Tenaga’s earnings revision cycle from the tariff hike, commencing in 2QFY14, will continue to propel its re-rating focus forward. Additionally, coal costs has fallen to US$73/tonne (vis-à-vis US$77.50/tonne in 1HFY14, the new tariff structure’s implied US$87.50/tonne and our unchanged FY14F-FY16F assumption of US$85/tonne) which could drive further upgrades to consensus earnings estimates.

- 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 FY15F PE of 11.5x, compared with the stock’s 3-year average band of 10x-16x. Foreign shareholding has slid slightly to 27.3% in March this year, down slightly from 27.8% in December 2013, and near its peak of 28% back in April 2007.

Source: AmSecurities