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

Tenaga Nasional Bhd
(Dec 9, RM8.79)
Maintain buy at RM8.58 with target price of RM9.98: Tenaga announced that is has entered into a letter of understanding (LOU) with Yemen's National Trading Co (Natco) to explore cooperation in Yemen's power industry. The areas of cooperation will include: i) system planning; ii) design, project management and development; iii) system operation; iv) system maintenance; v) generation and distribution; and vi) related training. Tenaga's role in the project is yet to be determined.

Natco is a wholly owned by the Hayel Saeed Anam (HSA) Group, which is involved in industrial, trading, services and contracting in power utilities and manufacturing. Recently, it won a government tender to build a 90MW power generation plant in Yemen.

We believe the collaboration is in line with Phase 2 of Tenaga's 20-year strategic plan that will focus on geographical expansion in the Middle East and North Africa.

We do not expect any major obstacles with respect to Tenaga's capex requirements for the collaboration. The venture is based on a project financing option and Tenaga sits on a cash hoard of more than RM8 billion as at end FY2010. Reports in the media indicate that Tenaga's capital outlay is expected to be in the region of US$120 million (RM377 million). Pending further details, we reiterate our earnings forecasts for now.

We maintain our 'buy' recommendation with a target price pegged at RM9.98 on a discounted cash flow valuation (WACC: 10.9%, terminal growth: 3%). We remain positive about Tenaga because: i) strong power demand growth of 8.8% this year and 4.5% in 2011; ii) better cost management; iii) positive impact from the appreciation of the ringgit against the US dollar and the yen; and iv) a continued upward trend in its foreign shareholdings, at 12.6% in October (from 8.8% in March). ' MIDF Research, Dec 9


This article appeared in The Edge Financial Daily, December 10, 2010.