Tenaga Nasional (Tenaga) has been receiving less than 1000mmscfd gas supply for the first half of 3Q12 due to outages at PETRONAS' facilities. It is disappointing as it is  less than our assumed FY12E gas supply average of 1150mmscfd, meaning there could be a 14% downside to our FY12E core earnings (excluding fuel compensations). On the positive side, Tenaga will get fuel compensations up till Sep-12, which minimises its cash flow risks for the year. We think the FY12 gas supply volatility is fully priced in and investors will look towards FY13E for a more normalised gas supply, declining coal prices and strong government support, which will lead to either regular fuel compensations or tariff hikes. For now, we maintain our FY12-13E core earnings at RM1.82b-RM2.98b pending further clarity on gas supply for the remaining second half of 3Q12. We also maintain an OUTPERFORM on Tenaga with an unchanged TP of RM7.50 based on average FY12-13E core EPS and target Fwd PER of 17.0x.

Mar-12 average gas supply is less than 1000mmscfd, as PETRONAS facilities underwent planned maintenance. Suruhanjaya Tenaga (ST) website indicated Mar-12 average gas supply to the power sector was at 974mmscfd. Neither was early Apr-12 spared as the month's average gas levels remained at less than 1000mmscfd due to unplanned outages; ST indicates 920mmscfd average between 1/4/12 to 22/4/12. However, May-12 supply is said to be improving although the quantum has not been revealed. The weaker gas supply in the first half of 3Q12 is disappointing, particularly when we expect FY12E to average at 1150mmscfd. 

Risks to earnings mitigated by government compensations.  Assuming 3Q12 and 4Q12 gas supply averages at 1000mmscfd and 1150mmscfd respectively, FY12E average will only be 1012mmscfd. This also assumes FY12E Peninsular's unit demand growth is maintained at 4.5%.  If so, it means our  FY12E core earnings could potentially be lowered by 14% to RM1.56b; note we do not include fuel compensations in our core earnings calculations. However, note that Tenaga will get fuel compensations until Sep-12, which minimises its cash flow risks (note reimbursements lag by 1 quarter). If our scenario pans out, total fuel compensations for 2H12 could amount to c.RM260m (before tax), meaning Tenaga will get c.RM170m (before tax) after apportioning among Tenaga, government and PETRONAS. For now, we maintain our FY12-13E core earnings at RM1.82bRM2.98b pending further clarity on 3Q12's remaining second half gas supply. 

Looking towards FY13E. We think FY12E gas supply issues have been fully priced in and investors are looking towards 1) FY13E normalised gas supply, particularly when the Melaka regasification plant can firmly cater for another 200mmscfd to the power sector by Aug/Sept-12, 2) increasing possibility of Tenaga passing on market prices of gas arising from Melaka regasification gas supply via tariffs or being compensated by the government and 3) declining coal costs given increasing supply. More importantly, there is a strong show of government support. To recap, management mentioned during the 2Q12 briefing that the government would ensure 'neutral' impact from gas price increases, which would appear to address concerns of Tenaga buying portions of gas at market prices. 

Importance of efficient power plants.  The government will be rolling out 4,500MW new gas power capacity and the first up is  the bid for the new Prai gas power plant (up to 1,400MW); so far, there are 9 short-listed bidders for Prai which includes consortiums led by Tenaga, YTL Power International (MP; TP: RM1.82), MMC Corporation's (OP; TP: RM3.20). We had the privilege of visiting Tenaga's most efficient gas power plant (CCGT), namely Tuanku Ja'afar Power Station @ Port Dickson (more details below). The plant underwent a 'rehabilitation' which improved efficiency to 56% from 38% previously. Our back of the envelope calculation reveals that every 5ppt increase in efficiency rate lowers  gas fuel cost by 8%-10% to produce the same amount of electricity. This would be another avenue to reduce fuel costs burdens over the longer run.

Source: Kenanga