- We maintain BUY on Tenaga Nasional Bhd but lower our fair value from RM17.00/share to RM16.40/share, which implies a forward PE of 14.5x and P/BV of 1.9x.

- In a filing to Bursa Malaysia yesterday, Tenaga said that the Imbalance Cost Pass-Through (ICPT) rebate of 2.25 sen/kWh for Peninsular Malaysia will be extended for the next six months, i.e. from 1 July 2015 to 31 December 2015.

- Recall that back in February 2015, the government had approved a reduction in power tariffs for Peninsular Malaysia by 2.25sen/kWh (-5.8%) and Sabah by 1.20sen/kWh (-3.5%) effective 1 March to 30 June 2015. No mention of an extension for the rebate for Sabah was made.

- The ability to maintain the tariff rebate stems from the ongoing availability of ICPT savings, which had increased by RM59mil since the last review, to RM786mil (for the January to June 2015 period).

- The savings/cost-over-recoveries come on the back of lower generation costs, i.e. a more favourable generation mix (higher utilisation of the cheaper coal-fired power plants) as well as low fuel costs (primarily soft coal prices).

- Note that there is also an additional RM300mil of savings from the renegotiation of the PPAs of the 1st generation IPPs in the stabilisation fund.

- Although the status quo tariff will be earnings neutral to Tenaga given that tariff adjustments are now determined through the Incentive Based Regulation (IBR) framework and ICPT mechanism, we have had to tweak Tenaga’s FY15FFY17F earnings lower by 2%-3%.

- This adjustment follows the announcement of an increase in the benchmark rate for natural gas (piped) from RM15.20/mmBTU to RM16.70/mmbtu (+10%) for the existing tariff regime.

- The new rate applies to the first 1,000 mmscfd of natural gas Tenaga procures from Petronas and is still palatable given that the market rate is closer to RM50/mmbtu. The benchmark rate for imported LNG (introduced in the last base tariff review in November 2013) remains unchanged at RM41.68/mmbtu.

- Tenaga’s shares has been under heavy selling pressure of late following concerns that it will be overpaying for Edra Global Energy’s 70% stake in Jimah East Power (Project 3B). The stock had retraced by 15% since the press reported of the possibility of Tenaga taking over the project back in February 2015. The group had since received an invitation letter from the EC, including three key conditions, to do so.

- At the current price, the stock is trading at an undemanding FY15F-FY16F PEs of 11x, below its 3-year average of 15x. Dividend yields are also decent, at 2.7%.

Source: AmeSecurities Research - 26 Jun 2015