- We maintain our BUY call on Tenaga Nasional (Tenaga) with an unchanged DCF-derived fair value of RM15.00/share, which implies an unchanged FY15F PE of 15x and a P/BV of 2.1x.

- We have fine-tuned our Tenaga’s FY15F-FY16F earnings but maintain our coal cost assumption of US$85/tonne even though prices are currently well below US$70/tonne, as the biannual tariff review will adjust for the fuel cost differential.

- Our FY15F-FY17F electricity demand growth forecast is maintained at 3% on expectations of stronger economic growth, even though Tenaga had achieved a unit increase of only 2.5% in FY14. We introduce FY17F earnings with a 6% earnings growth, cruising on a steady 3% electricity demand growth.

- Tenaga’s FY14 core pretax profit (excluding forex gains of RM445mil and RM350mil writeback of provisions for Pakistan-based Liberty Power Ltd) of RM6,319mil came in within our and street’s expectations.

- But Tenaga’s core net profit in comparison with street’s estimates (high of RM6,752mil and low of RM4,483mil) are skewed by Tenaga’s prior year adjustments for reinvestment allowances of RM662mil for FY13-FY14. Tenaga declared a 4QFY14 dividend of 19 sen, which raised FY14 DPS by 4 sen to 29 sen, representing 58% of the group’s free cashflow.

- The group’s 4QFY14 core pretax profit rose 19% to RM2,157mil largely due to lower fuel costs and a one-off reversal of provisions for Liberty Power. But Tenaga’s core net profit of RM1,203mil (excluding forex gain of RM153mil) fell 23% QoQ largely due to a hefty effective tax rate of 46% (vs. only 13% in 3QFY14), driven by an 9MFY14 earnings adjustment arising from the group’s previous treatment for FY13 reinvestment allowance.

- Tenaga’s strong earnings are underpinned by the persistent weakness in coal prices, which have fallen below US$70/tonne (see Exhibit 3), compared to US$72.90/tonne in 4MFY14. Management indicated that there remains a shortfall in the new tariff structure of up to RM600mil in FY14 due to the higher price of liquefied natural gas at RM47/mmbtu compared to the threshold of RM41.68/mmbtu, even though FY14 coal costs of US$75.40/tonne is below the tariff’s assumption of US$87.50/tonne.

- If the regulatory bodies allow these additional costs to be recouped from higher tariffs or savings from the extensions of the first generation power plants, there will be an 8% boost to FY15F earnings.

- The stock currently trades at a decent P/BV of 1.7x, within the adjusted 1.1x-2.0x over the past 5 years. Tenaga also offers a fair FY15F PE of 13x, compared with the stock’s 3-year average band of 10x-16x. Foreign shareholder levels remain stable at 25% since April this year.

Source: AmeSecurities