Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD
Tenaga Nasional Bhd
(Sept 26, RM4.99)
Maintain buy at RM5.02 with fair value of RM6.40: The Edge reported that a special-purpose unit My-Power Corp is overseeing the government's proposal to break up Tenaga's transmission, distribution and generation divisions as part of the nation's power sector reforms. Three accounts will be individually scrutinised to improve transparency and identify problem areas. My-Power Corp was established primarily to review the existing power purchase agreements (PPA) between independent power producers and TNB, and this remains one of the many issues under evaluation.
One of the solutions being considered is a government takeover of TNB's less profitable divisions ' the transmission and distribution operations, while the more profitable power generation remains in the listed entity. This will open up the transmission and distribution system to all players and enable the government to choose the cheapest electricity in its grid.
The proposal to break up TNB had been mooted over 10 years ago before the California energy crisis in 2000 and was eventually abandoned. In our view, the key obstacles to breaking up TNB's integrated operations are:
1) Fixed reservation charges for PPAs are expected to continue, with the earliest expiring in September 2015 (for YTL Power's Paka and Pasir Gudang plants). Earlier attempts to restructure or charge a windfall tax resulted in sharply increased funding costs in the capital markets and were subsequently aborted.
2) No automatic cost pass- through mechanism for the country's electricity tariffs due to political sentiments and potentially adverse impact to the country's general economic well-being.
Hence, even if the government takes over the unprofitable operations of TNB, this would still represent a subsidy unless electricity and natural gas prices are fully deregulated. As the government's stated policy is to gradually deregulate natural gas prices by 2022, we view the proposed plan to break up TNB as a protracted affair.
The current natural gas shortfall and high fuel costs have resulted in TNB trading at a highly attractive single-digit FY12F PE valuation of only eight times ' at the bottom of its five-year band of eight to 15 times. It is also trading below its book value of RM5.32 per share, matching its lowest level for the past 12 years. ' AmResearch, Sept 26
This article appeared in The Edge Financial Daily, September 27, 2011.
Company Name: TENAGA NASIONAL BHD
| Research House: AMMB | Price Call: BUY | Target Price: 6.40 |
Tenaga Nasional Bhd
(Sept 26, RM4.99)
Maintain buy at RM5.02 with fair value of RM6.40: The Edge reported that a special-purpose unit My-Power Corp is overseeing the government's proposal to break up Tenaga's transmission, distribution and generation divisions as part of the nation's power sector reforms. Three accounts will be individually scrutinised to improve transparency and identify problem areas. My-Power Corp was established primarily to review the existing power purchase agreements (PPA) between independent power producers and TNB, and this remains one of the many issues under evaluation.
One of the solutions being considered is a government takeover of TNB's less profitable divisions ' the transmission and distribution operations, while the more profitable power generation remains in the listed entity. This will open up the transmission and distribution system to all players and enable the government to choose the cheapest electricity in its grid.
The proposal to break up TNB had been mooted over 10 years ago before the California energy crisis in 2000 and was eventually abandoned. In our view, the key obstacles to breaking up TNB's integrated operations are:
1) Fixed reservation charges for PPAs are expected to continue, with the earliest expiring in September 2015 (for YTL Power's Paka and Pasir Gudang plants). Earlier attempts to restructure or charge a windfall tax resulted in sharply increased funding costs in the capital markets and were subsequently aborted.
2) No automatic cost pass- through mechanism for the country's electricity tariffs due to political sentiments and potentially adverse impact to the country's general economic well-being.
Hence, even if the government takes over the unprofitable operations of TNB, this would still represent a subsidy unless electricity and natural gas prices are fully deregulated. As the government's stated policy is to gradually deregulate natural gas prices by 2022, we view the proposed plan to break up TNB as a protracted affair.
The current natural gas shortfall and high fuel costs have resulted in TNB trading at a highly attractive single-digit FY12F PE valuation of only eight times ' at the bottom of its five-year band of eight to 15 times. It is also trading below its book value of RM5.32 per share, matching its lowest level for the past 12 years. ' AmResearch, Sept 26
This article appeared in The Edge Financial Daily, September 27, 2011.
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