- 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 Star reported today that the Energy Commission (EC) has decided to award Project 4A, which involve building a new combined cycle gas turbine plant with a capacity of 1,000MW-1,400MW, on a direct negotiation basis. This decision will be made by the Planning and Implementation Committee for Electricity Supply and Tariff, under the Energy, Green Technology and Water Ministry.

-  While this is in direct conflict with the EC chairman Datuk Abdul Razak Abdul Majid’s recent statement that the projects will continue to be awarded via competitive tenders, this policy change reflects the need to fast track this project following the power blackout in 5 states in Peninsular Malaysia earlier this month.

-  The Edge had also reported 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.

-  Yesterday, Business Times reported that YTL Power International is speculated to be in direct negotiations with the EC is to secure either the Track 4A or 4B power plant projects.

-  For Project 4A, we are uncertain at this stage which party will secure the project as there is likely to be strong political opposition to the EC’s policy reversal. Tenaga’s unions have recently expressed their concerns to the EC chairman.

-  For now, Tenaga is still a strong candidate for this project, given that it is the sole off-taker for power generation in Peninsular Malaysia. Also, for Track 4A to be fast-tracked, Tenaga needs to expedite the completion of the 500-kilovolt southern line, which links Lenggeng in Negri Sembilan to Yong Peng in Johor, from an earlier schedule in December 2018.

-  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 S$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.

Source: AmeSecurities