Tenaga Nasional; Hold; RM6.49
Target Price: RM7.00; TNB MK

TNB has signed a two-year Memorandum of Understanding (MOU) with PT PLN, the Indonesian state owned utility company and PT Bukit Asam, a company primarily involved in coal mining in Indonesia. The scope of the MOU covers the construction of a 275KV interconnection line from Telok Gong in Malacca to Garuda Sakti in Sumatera, Indonesia. The development also includes construction of a mine mouth coal fired power plant in Peranap, which is located 250 km south east of Pekanbaru, Sumatera.

The MOU will facilitate cross border electricity-exchange. If successful, we believe that it would enhance TNB and IPPs’ future earnings given the strong power demand growth in Indonesia of 8% p.a. and low electrification ratio of c.70%.

We maintain HOLD for TNB as the MOU is still at early stages. TNB’s current valuation has priced-in the recovery in gas supply and compensation for gas shortages. It is negotiating for additional gas supply, but a tariff hike is unlikely due to upcoming election.

Source: HwangDBS Research - 19 June 2012