-  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 execution of Memorandum of Understanding with IMDB’s wholly-owned Powertek Berhad and Bangladesh Power Development Berhad (BPDB) to develop a 1,320MW Coal-Fired Power Plant at Maheshkali, Cox’s Bazar, Bangladesh on a build-own-operate basis.

-  A firm agreement between the 3 parties is pending a feasibility study, approvals, and the signing of a long-term power purchase agreement (PPA) with BPDB.

-  Newspapers reported that the plant could cost RM6bil, which translates to RM4.5mil/MW, which is 18% lower than Tenaga’s 1,000MW Project 3A’s cost of RM5.5bil or RM5.5mil/MW.

-  With an installed capacity of 10,289MW (47% of Malaysia;s 21,740MW) for a population of 156mil, Bangladesh is amongst the lowest in the world in terms of energy consumption on per capita basis.

-  There is no significant domestic coal production in Bangladesh, hence, the plant operator would need to import its fuel supply.

-  While the equity stake for Tenaga in this power plant has not been ascertained yet, assuming a 40% stake, a 25-year PPA and a project IRR of 12% translates to a net NPV accretion of RM1.4bil or 2% of Tenaga’s current market capitalisation.

-  Any impact to earnings from this proposed plant, if it materialises, is beyond our forecast horizon as the plant is only scheduled to commence commercial operation in 2019.

-  We are neutral on Tenaga investing in this plant, which is part of the group’s strategy of overseas expansion. Nevertheless, we are cautious on Bangladesh’s uncertain sovereign risks, particularly given the group’s past unpleasant experience with the 235MW Liberty Power plant in Pakistan, which had previously made significant provisions for diminution in value, after encountering fuel supply and electricity offtake problems with the authorities.

-  On the domestic front, 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