Although  the  Government  did  not  announce  specific  measures  on potential natural gas price revisions, we remain  confident  that the fuel cost  pass-through  formulae  will  be  implemented  sooner  rather  than later  –  given  the  reaffirmation  of  its  stance  on  rationalising  subsidies during the 2014  Budget.  All in, we are maintaining our BUY call on TNB with our MYR10.13 FV unchanged, which is based on 13x FY14 P/E.

• Second-largest  subsidy  item.  In  our  previous  report,  we  highlighted that the existing natural gas subsidy  –  at MYR10-12bn per year  –  was estimated  to  be  the  second-largest  subsidy  item  in  2013.  Only  the MYR25bn spent annually on petrol and diesel subsidies are higher.
• Quantum  of  subsidy  too  big  to  ignore.  Based  on  current  market prices, the natural gas subsidy could balloon to MYR16-17bn per annum, making up 1.5-1.6% of our MYR1.06bn 2014 GDP estimate. Considering the quantum involved, we continue to believe that a rationalisation of the existing subsidy will help the nation to achieve its budget deficit target.
• Potential savings.  Based on our calculations, every MYR3 per  million British thermal unit (mmbtu) hike in natural gas prices can save Petronas (and,  hence,  the Government) some MYR1.3-1.5bn per year. Given that the current subsidised rate of MYR13.70 per  mmbtu  is at close to 75% discount  to  the  market  rate,  we  continue  to  believe  that  the  potential revision will be implemented on a staggered basis.
• Maintain BUY.  All in, we are maintaining our BUY call on TNB with our FV unchanged at MYR10.13, which is based on 13x FY14 P/E – pending its 4QFY13 results  to be  released  on 31 Oct.  Although the Government did not announce any specific measures on potential natural gas price revisions  during  the  Prime  Minister’s  2014  Budget  speech,  we  believe that  it is just a matter of timing, given the reaffirmation of its stance on rationalising  the  existing  subsidy  scheme  to  achieve  its  deficit  target. Should  there  be  a  knee-jerk  reaction  upon  market  opening  today,  we advise  investors  to  accumulate,  as  we  foresee  more  positive developments on  the  long-awaited implementation of  the  fuel cost  passthrough formulae as we move into 2014.

Financial Exhibits

SWOT Analysis

• Potential implementation of a fuel cost passthrough mechanism will help to ensure sustainability of the national utility company’s profitability in the long run.

Company Profile
Tenaga  Nasional  (TNB)  is  Malaysia's  national  utility  company  and  has  a  near  monopoly  on  the  transmission  and  distribution  of electricity in Peninsular Malaysia and Sabah

Recommendation Chart

Source: RHB