Despite share price rising 43% YTD, we still see more upside on TENAGA, especially after the yesterday’s announcement on tariff review. TENAGA is expected to raise the tariff rates in the Peninsular by an average of 14.89% effective next month on the back of a RM1.50/mmbtu hike in domestic gas price while the imported LNG has been fixed at RM41.68/mmbtu. In all, we upgrade FY14-FY15 estimates by 15%-16% as the tariff revision is earnings positive to TENAGA, partly gain from a hike up in base tariff by 2.69%. Keeping our targeted CY14 PER unchanged at 14x, our new price target is now upgraded to RM12.07/share from RM10.45/share previously. TENAGA remains OUTPERFORM and TOP PICK for the power sector.

15% tariff hike, finally. The government finally announced the long awaited new tariff structure yesterday, the first time in two years, where effective 1 Jan-14 the average electricity tariff in the Peninsular will be increased by 4.99 sen/kWh or 14.89% from the current average of 33.54 sen/kWh to 38.53 sen/kWh, based on the four components of: (i) domestic gas price adjusted to RM15.20/mmbtu from RM13.70/mmbtu; (ii) the imported LNG fixed at RM41.68/mmbtu; (iii) the coal base price of USD87.5/mt from USD85/mt; and, (iv) the base tariff is being raised by 2.69% or 0.90 sen/kWh from the current average tariff.

RM1.17b positive earnings impact annually. The average 14.89% hike in tariff would increase FY14 electricity sales by RM3.05b or 8% while the upward adjustment in gas prices would add an extra fuel cost of RM2.27b or 32% to TENAGA. This would result a RM786m extra earnings before tax in FY14 for TENAGA, or c.RM1.17b annually. This estimate is not far off from the potential benefit arising from the adjusted base tariff upward by 2.69% or 0.90 sen/kWh, which is estimated at c.RM900m.

FY14-FY15 estimates upgraded by 15%-16%. For the first time, we have imputed the market price for imported LNG which is based on RM41.68/mmbtu into our assumption and raised domestic gas price to RM14.70/mmbtu and RM15.20/mmbtu for FY14-FY15 respectively (both from RM13.70/mmbtu). Gas consumption will be charged based on domestic gas price for up to usage of 1,000mmscfd while any consumption more than 1,000mmscfd in integrated utility will have to pay for the imported LNG price. Despite the coal base price being fixed at USD87.5/mt, we are keeping our assumption of USD95/mt unchanged. As such, our FY14-FY15 earnings and NDPS upgraded 15%-16% respectively.

Price positive to TENAGA. While the revised tariff is supposed to have earnings neutral to the integrated utility, but the past four tariff adjustments had somewhat resulted earnings positive to TENAGA. This was also coincided with strong share price performance for TENAGA in each of the reviews, soaring 3%-9% immediately the day after the announcement to as high as 8%-10% within a month. As such, we expect the same to happen this time, albeit it already rallied 10% in the past two months.

TP raise to RM12.07/share. In the past four tariff reviews, TENAGA traded between 12x-14x. Thus, we keep our targeted CY14 PER unchanged at 14x to derive our new price target of RM12.07/share from RM10.35/share. In view of its FBMKLCI weighting, our valuation is not excessive given the market is currently trading at 16x-17x. TENAGA remains as OUTPERFORM and is our TOP PICK for the power utilities.

Source: Kenanga