Tenaga Nasional - Further rerating on declining gas and coal prices BUY

Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD

Research House: AMMB

Price Call: BUY

Target Price: 7.35

- We reiterate our BUY call on Tenaga Nasional (Tenaga), withan unchanged DCF-derived fair value of RM7.35/share, which implies a CY12F PEof 13x and a P/BV of 1.3x. 

- Tenaga's earnings prospects are being transformed by decliningcoal and natural gas prices, driven by rising shale gas supply and slowingdemand from China amid rising coal supplies from Australia and Indonesia.

- Coal, which accounts for 43% of Tenaga's 1QFY12 fuel costs,has seen a price decline of 24% since its 2011 peak of US$138.50/tonne(Newcastle spot at 6,700 calorific value) in June last year. At current prices,Tenaga's all-in blended costs of US$95/tonne translate to 14% below our FY12F-FY14Fcoal assumption of US$110/tonne.

- Additionally, concerns on an unpalatable increase in electricitytariff with the new gas supply from the Melaka regassification plant by Augustthis year is being alleviated given that Henry Hub natural gas prices have fallenby 56% since its January 2011 peak to US$2.19/mmbtu (RM6.60/mmbtu). This ishalf the price of RM13.70/mmbtu which Tenaga is paying to Petronas.

- Assuming a price of RM7/mmbtu for natural gas supplied viaPetronas Gas' peninsular pipeline and a 20% premium (for added gas processingand transport costs by Petronas Gas) to Japan's LNG current import price of US$17/mmbtufrom Qatar, we estimate Tenaga's blended gas costs could rise by only 6% fromRM13.70/mmbtu to RM14.50/mmbtu. This could be easily offset by a slight 1% increasein average electricity tariffs, given that gas cost currently accounts for 23%of Tenaga's electricity revenue in Peninsular Malaysia. 

- Besides lower energy costs, other valuation kickers for Tenagastem from:-

(1) Re-pricing of electricity and fuel tariffs, which has usuallyyielded a net margin upside for Tenaga in the past. The power-gas priceadjustment in May last year provided a 2% net tariff increase. If the powertariff structure adjusts the embedded coal price of US$85/tonne currently toour assumption of US$110/tonne, net electricity prices will rise by 1.6%, translatingto a 32% increase in FY13F net profit.

(2) Improving gas supply from an additional 70mmscfd fromthe Joint-Development Area with Thailand in 1QCY12 and the Malaccaregassification plant in August this year.

(3) Positive policy moves by the government and Energy Commissionto encourage first generation independent power producers to accept lowercapacity payments for extension of their power purchase agreements. We estimatethat a 10% reduction in the capacity charge of the first generation's 4,115MWcould translate to an 11% increase to Tenaga's FY13F net profit. 

- The stock still trades at a P/BV of 1.2x, at the lowerrange of 1x-2.6x over the past 5 years. Earnings-wise, Tenaga offers anattractive CY12F PE of 11x compared with the stock's three-year average band of10x-16x.

Source: AmeSecurities