- We reiterate our BUY call on Tenaga Nasional with a higher fair value of RM18.40/share (vs. RM16.30/share previously), which implies an FY15F PE of 12.5x and a P/BV of 2.1x.  

- We have raised Tenaga’s FY15F-FY17F earnings by 24%-27% following downward revisions to:- (1) our coal cost assumptions (from USD85/tonne to USD 65/tonne) given the weak coal prices (~USD62/tonne); (2) LNG price input (from RM45/mmbtu to RM40/mmbtu) in anticipation of lower gas prices in tandem with the slide in crude oil prices (time lag of 3-6 months); and (3) Tenaga’s effective tax rate from 27% to 13% per management’s guidance following the availability of reinvestment allowances until FY17F. Our FY15F-FY17F electricity demand growth forecast is maintained at 3%.  

- Excluding the RM46mil forex gain, Tenaga’s 1QFY15 core net profit of RM2,305mil came in above expectations, accounting for 35% of our earlier FY15F forecast of RM6,554mil and 38% of street’s RM6,201mil.  

- The jump in Tenaga’s YoY core earnings (+54%) came on the back of revenue growth of 15%, which mainly stemmed from the 3.3% increase in electricity demand and the Jan 2014 tariff hike of 14.9%.  

- On a sequential basis, the group had managed to nearly double its net profit (+91%) despite registering a slight decline in its topline (-5%) thanks to:- (1) lower fuel costs following the shift in its generation mix towards cheaper fuel sources (namely coal and hydro from LNG); (2) downward revaluation of the retirement benefit fund; as well as (3) seasonally lower repair and maintenance expenses.  

- We understand that the cost over-recovery (RM200mil in 1QFY15) has been set aside by Tenaga pending the government’s decision on its use.  

- Management intends to pare down its USD debt exposure by redeeming its USD350mil debt due in May 2015. We do not expect significant forex losses as 80% of the loan amount is hedged. This would reduce its USD debt exposure by 56%.  

- Earnings aside, we learnt that an electricity tariff review is still on the cards in July 2015. This is a surprise given that a deferment for a hike had been announced during the 2015 budget revision on 20 Jan.  

- That said, we expect tariff adjustments to be earnings neutral to Tenaga as the pricing structure is determined through the ICPT mechanism. We believe that Tenaga’s improving earnings transparency will help drive its re-rating process.  

- The stock currently trades at a P/BV of 1.7x, which is within its 5-year range of 1.1x-2.0x. Earnings-wise, the stock offers an attractive FY15F PE of 9.9x, at the lower end of its 3-year band of 10x-16x. Foreign shareholder levels remain stable at 25.8% since April 2014.

Source: AmeSecurities