-  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.

-  We have fine-tuned Tenaga’s FY14F-FY16F earnings as our lower tax assumptions are largely offset by a 1ppt reduction in electricity demand growth forecast to 3% from 4%, as demand growth in 10MFY14 had only reached 2.5%.

-  Tenaga’s 9MFY14 core net profit (excluding forex gains of RM292mil) of RM4,823mil came in within our expectations, accounting for 75% of our FY14F net profit of RM6,410mil. Tenaga did not declare any interim dividend in 3QFY14 as expected, thus maintaining 9MFY14 DPS at 10 sen/share.

-  But Tenaga’s FY14F consensus net profit of RM4,999mil, which is almost near the 9MFY14 results, may not be comparable as street estimates may not have included oneoff reinvestment allowances and deferred tax write-backs announced in 2QFY14.

-  Tenaga’s 3QFY14 core net profit declined by 13% QoQ to RM1,552mil largely due to the positive tax charge in 2QFY14, which was driven by these reinvestment allowances and deferred tax write-backs.

-  But normalising tax rates in 2QFY14, we note that Tenaga’s 3QFY14 core net profit would have surged by 28% due to the full quarter impact of the 3ppt net tariff increase effective in mid-January this year and the cessation of bearing 1/3 of the liquefied natural gas costs (LNG).

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

-  The surge in 3QFY14 earnings reaffirms our conviction that the recent tariff hike will continue to propel Tenaga’s re-rating momentum forward. Additionally, coal prices have fallen below US$70/tonne (See chart 3), compared to US$76.50/tonne in 9MFY14 and the new tariff structure’s US$87.50/tonne base.

-  But for now, we maintain our FY14F-FY16F coal assumption of US$85/tonne as the decline in coal costs could be mostly offset by the increase in LNG costs to RM47.65/mmbtu in 2QCY14 (vis-a-vis the tariff structure’s RM41.68/mmbtu) from RM46/mmbtu in 1QCY14.

-  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 11.2x, compared with the stock’s 3-year average band of 10x-16x.

-  Foreign shareholders have been progressively selling down the stock from a peak of 27.8% in December 2013 to 25.4% in May this year.

Source: AmeSecurities