- We reiterate our BUY call on Tenaga Nasional, with  an unchanged DCF-derived fair value of RM7.35/share, which implies a CY12F PE of 13x and a P/BV of 1.1x.

- Business Times reported today the Energy Commission chief executive officer Datuk Ahmad Fauzi Hasan as saying that the decision for the extension of the first generation independent power producers (IPPs) will be revealed in September this year.

- The restricted tender for the IPPs to reduce their capacity payments in exchange for the extension of their power purchase agreements (PPAs) by another 10 years will close this month. Hasan said that the PPAs expiring in 2016-2017 will not be renegotiated after being replaced with the new contractual terms.

- Hasan indicated that the capacity payments could be reduced by as much as RM6/kWh. This is much lower than earlier reports by The Edge that capacity payments could be lowered by up to 80% from RM35-RM50/kWh to RM6/kWh.

- The earlier reports had said that the six bidders ' Powertek, Genting Sanyen Power, YTL Power Generation, Port Dickson Power, Segari Energy Ventures and Tenaga ' were in  the running to extend the power generation capacity of up to 2,350MW, with negotiations at internal rates of below 10%. 

- This means that 57% of the PPAs of the total first generation capacity of 4,115MW could be extended. If the capacity charge were to be reduced by only RM6/kWh, Tenaga's FY13F net profit will increase by 3% compared with 66% if the capacity charge were to be reduced by 80%. 

- But there is a possibility that a large portion of  the cost savings could be used to offset the higher natural gas costs arising from the commencement of the 530mmscfd Lekas regassification plant in September this year. Hence, we maintain FY12F-14F earnings, pending Tenaga's 3QFY12 results announcement this Thursday 19 July, which we expect to be in line with expectations due to lower coal prices and stabilising gas supply.

- We remain positive on Tenaga due to:-  (1) Normalised natural gas supply from the Lekas regassification plant in Malacca by September this year providing clearer earnings visibility, (2) Falling global coal prices positively transforming the company's cost structure, (3) Pending the upcoming elections, there is a possibility that Petronas and the government will continue to bear the higher liquefied natural gas costs from the Malacca regassification  plant, which could mitigate further fuel cost pressures, and (4) New power purchase agreements in an open tender environment, with Tenaga as the bidder and sole off-taker, will further drive its fixed power purchase costs lower.

- The stock currently trades at a P/BV of 1x, at the lower range of 1x-2.6x over the past 5 years. Earnings-wise, Tenaga offers an attractive FY13F PE of 10x compared with  the stock's three-year average band of 10x-16x.

Source: AmeSecurities