- We reiterate our BUY call on Tenaga Nasional, with anunchanged DCF-derived fair value of RM7.35/share, which implies a CY12F PE of13x and a P/BV of 1.1x.
- Petroliam Nasional (Petronas) has signed an agreement toincrease its supply of natural gas to Keppel Corporation's wholly-owned KeppelEnergy by 43 million cubic feet of gas per day (mmscfd) to 115 mmscfd.
- Under the 18-year agreement, Petronas will supply the gasthrough a new 5-kilometre pipeline that will link its peninsular gasutilisation (PGU) pipeline from a metering station at Plentong in Johor toSingapore's main gas network. Petronas Gas and Keppel Gas will jointly buildthe pipeline, which is scheduled for completion by the middle of next year. Thegas will be used to power Keppel Energy's 500 megawatt cogeneration plantcurrently under construction on Jurong Island.
- Recall that Tenaga has been suffering from a natural gasshortfall since early last year due to Petronas' unscheduled upstreammaintenance works, which at one point forced Tenaga to temporarily purchaseelectricity from YTL Power's Singapore-based Power Seraya plant. But this saleto Keppel underpins our confidence that Petronas' gas supply issues should befully alleviated with the 500mmscfd Lekas re-gassification plant in Malacca,which commences operation in August this year. Out of this capacity, 200mmscfdwill be supplied to the power sector.
- We remain positive on Tenaga due to:- (1) Stabilisingnatural gas supply will provide clearer earnings visibility, (2) Falling globalcoal and US-based natural gas prices, which will positively transform thecompany's cost structure. A US$10/tonne decrease in coal costs will raise FY13Fnet profit by 14%, (3) Likelihood that Petronas and the government willcontinue to bear the higher liquefied natural gas costs from the Malacca regassification plant in the near term (dueto political factors), which could mitigate further fuel cost pressures, (4)New plant-ups to replace the first generation independent power producers, withexpiring power purchase agreements likely to reduce capacity payments. In anopen tender environment with Tenaga as the bidder and sole off-taker, fixedpower purchase costs are likely to decline.
- The stock currently trades at a P/BV of 1x, at the lowerrange of 1x-2.6x over the past 5 years. Earnings-wise, Tenaga offers anattractive CY12F PE of 11x compared with the stock's three-year average band of10x-16x.