Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD
Research House: AMMB

KUALA LUMPUR: AmResearch reiterated its BUY call on TENAGA NASIONAL BHD [] (Tenaga) with an unchanged fair value of RM10 a share, based on a 10% discount to DCF of RM11.10 a share.



On Tuesday, Sept 7 Tenaga announced the signing of three small renewable energy (RE) agreements to purchase electricity for 21 years which will increase the group's RE capacity by 20.5MW or 23% to 109MW.



The annual purchase value of RM38 million translates to a unit rate of 21 sen/KWh, comparable with the RE agreements which Tenaga signed in the past.



"The cost of purchasing RE is higher compared to coal generation, estimated at 18-19sen with coal prices at US$90/tonne. But the impact to Tenaga is insignificant as the group's RE capacity represents only 0.5% of peninsula Malaysia's installed capacity of 21,817MW," it said in its report on Tenaga on Wednesday, Sept 8.



Valuation-wise, Tenaga trades at an attractive CY11F PE of 11x vis-vis a 3-year average of 14x.



AmResearch said it continued to like Tenaga due to the following:

(1) Stronger power consumption growth - a 1-ppts increase could lead to a 3% earnings enhancement;

(2) A strengthening ringgit which enhances earnings by 12% for a 10% ringgit appreciation;

(3) Improving economies of scale with declining power reserve margin - currently at 42%;

(4) Possibility of an electricity and gas tariff adjustment towards the year-end;

(5) Higher dividend payout; and

(6) Return of foreign investors, as their holdings rose from 8.5% in January 2010 to 11.2% in July this year.