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

- The Edge Financial Daily reported today that Tenaga, which recently called for an expression of interest in providing equipment, engineering, procurement and construction of project 4A involving a 1,000MW-1,400MW combined gas cycle power plant, may be partnering with the Sultan of Johor to locate the site in Pasir Gudang, Johor. This is part of the 2,000MW gas fired capacity planned by the Energy Commission under Projects 4A and 4B.

- The report indicated that the Cabinet has approved the award of Project 4A through direct negotiations instead of an open tender which could have extended the project’s timeline, following blackouts in 5 states last week.

- This stemmed from a load-shedding exercise due to unplanned shutdowns for 2 blocks of Janamanjung’s 2,100MW coal fired power plant and a 700MW block at 1MDB’s Jimah power station in Negeri Sembilan, which experienced leaking boilers.

- Janamanjung’s boiler leaks have been repaired while Jimah’s shutdown could take a longer time. We expect a higher usage of more costly liquefied natural gas (LNG) for the week that these coal plants were not in operation. For now, we maintain Tenaga’s FY14F earnings, pending further clarity on the temporary impact of higher fuel costs.

- For Project 4A, our channel checks indicate that it is still unclear as to which party the project has been awarded. But we are positive that Tenaga currently appears to be a strong candidate for this project, given that it is the sole off-taker for power generation in Peninsular Malaysia.

- 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 estimate.

- 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: AmeSecurities