Tenaga’s 9MFY14 core earnings of MYR3.5bn were  in line,  at 71.0% and 74.5%  of  consensus  and  our  full-year  forecasts  respectively.  The  key focus at yesterday’s  analyst briefing  involved  a  potential tariff revision in July  and  the availability of its coal-fired power plants.  Maintain BUY,with our FV unchanged at MYR13.75, based on 15.4x FY15F P/E.

In  line.  Tenaga  Nasional  (Tenaga)’s  MYR31.1bn  9MFY14  revenue (+12.6%  y-o-y)  was  on  higher  unit  sales  (+2.5%  y-o-y)  and  improved tariffs  following  the  1  Jan  2014  revision.  EBITDA,  however,  inched  up only  4.4%  y-o-y  to  MYR8.5bn,  as  the  lower  independent  power producers (IPPs) payments (-7.3% y-o-y) were offset by higher fuel costs (+82.1%  y-o-y).  This  was  on  increased  liquefied  natural  gas  (LNG)consumption,  which  makes  up  56.1%  of  its  units  generated  (9MFY13: 46.1%), following unscheduled outages at some of its coal -based power plants.

Briefing  highlights.  Management  remained  adamant  that  Tenaga  willbe  compensated  for  the  higher-than-expected  fuel  costs  incurred,  as stipulated under the fuel costs pass-through mechanism.  Given that the Government  is  currently  exploring  the  possibility  of  rationalising  petrol and diesel subsidies in 4QCY14  –  and with the  goods and  services  tax(GST)  to be implemented by April  2015  –  we believe  its  compensationwill likely  come in the form of a potential clawback  from  savings on  firstgeneration  IPP  renegotiations  (which  amounts  to  an  estimatedMYR500m),  instead  of  an  outright  tariff  hike.  We  expect a decision on this  to  be  made  latest  by  4QCY14.  To  our  comfort,  management indicated  that  operational  issues  at  most  of  its  coal-fired  power  plants have now largely been resolved,  with its generation mix set to normalise come  4QFY14.  This,  in  our  view,  will  likely  boost  its  near-term profitability,  as  coal  prices  continued  on  a  downtrend  to  average  at USD75/tonne currently. 

Forecasts and risks.  We make no  changes to our estimates for now. Key  risks  include:  i)  fluctuation  in  LNG  and  coal  prices,  ii)  volatility  in MYR against the USD, and iii) regulatory risks.

Valuations  and  recommendations.  All  in,  we  maintain  our  BUY  call and MYR13.75 V, based on 15.4x FY15F P/E. While the potential delay in the  proposed  tariff review in July could spark some selling pressure, we expect Tenaga to soon be compensated by the savings from the firstgeneration IPP renegotiations  and, with its coal-based generation set to normalise in 4QFY14, we see strength in its near-term profitability.

Source: RHB