- We maintain BUY 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.

- Tenaga has signed a non-binding Heads of Agreement (HoA) for the principal terms of the proposed joint venture with SIPP Energy Sdn Bhd to build, own, and operate a power plant with a capacity of 1000MW-1400MW on Tenaga’s available land in Pasir Gudang, Johor.

- Recall that back in May this year, the Energy Commission (EC) has decided to offer a conditional award for this proposed power plant (which was earlier designated as Project 4A) via a direct negotiation to SIPP Energy with participations by Tenaga and YTL Power International. At this stage, Tenaga’s management has not confirmed newspaper reports which indicated that SIPP Energy might be related to the Johor royalty.

- In contrast to the competitive tenders conducted since 2012, the EC stated that the policy change stemmed from a need to fast-track this project following the power blackout in five states in Peninsular Malaysia earlier this year. But following the negative publicity on the award, YTL Power has opted to withdraw from this project while Tenaga’s unions have also expressed their concerns to the EC chairman.

- As Tenaga needed to reply to the EC’s offer by today, we believe that this announcement, which did not indicate the HoA duration, was to provide additional time for deliberation.

- There are three conditions under the EC’s offer for Project 4A: (i) the levelised tariff must be comparable to the 1,071MW Prai combined cycle plant awarded back in 2012; (ii) the engineering, procurement, and construction provider must be selected through a competitive bid for a proven gas turbine technology; and (iii) technical and commercial proposals have to be approved by EC.

- At this stage, we believe that there is a strong likelihood that Tenaga will end up as a substantial equity partner in this project, given that it is the sole off-taker of power in Peninsular Malaysia. Also, for Track 4A to be fast-tracked, Tenaga needs to expedite the completion of the 500kV southern line, which links Lenggeng in Negri Sembilan and 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 below US$70/tonne compared to the new tariff structure’s implied US$87.50/tonne, which could easily offset higher liquefied natural gas prices.

- The stock trades at a decent P/BV of 1.8x, which is within the adjusted 1.1x-2.0x band over the past 5 years.

Source: AmeSecurities