Tenaga Nasional - 2QFY12 rebound from fuel relief and more gas supply 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),with an unchanged DCF-derived fair value of RM7.35/share, which implies a CY12FPE of 13x and a P/BV of 1.3x. 

- Excluding forex gains and the RM2bil fuel reliefcompensation arising from the use of additional distillates and oil, Tenaga's 1HFY11core net profit of RM864mil came in above expectations. On an annualised basis,this was 18% above our FY12F core net profit of RM1,466mil (excluding fuelrelief). We are unable to provide a meaningful comparison with  street estimate of RM2,242mil (high ofRM3.8bil and low of RM2.2bil), which is skewed by different assumptions, withsome likely not including the fuel relief. 

- But given gas supply variations until August this year, wemaintain Tenaga's FY12F-FY14F net profits which incorporate natural gas supplyassumption of 1,150mmscfd in FY12F and 1,350mmscfd for FY13F-FY14F. We alsomaintain our coal cost assumption of US$110/tonne (vs US$100/tonne currently)and electricity demand growth of 4% for FY12F-FY14F as guided by management.

- Tenaga's 2QFY12 core net profit surged by 2x to RM670mil largelyfrom a 67% QoQ contraction in the consumption of high cost distillates andmedium fuel oil. This came from:- (1) a 2% QoQ seasonal decline in Peninsularelectricity demand which reduced distillate and oil consumption, (2) a 6% QoQ increasein natural gas supply to 1,100mmscfd, and (3) a 24% QoQ increase in hydro-powergeneration due to good seasonal rainfall. 

- As we had earlier highlighted, provided in our forecast assumptionsand now confirmed by management, Tenaga has received a letter from thegovernment that stipulates that the additional fuel cost borne by the nationalutility will continue to be equally shared between Tenaga, Petronas and the governmentfrom 1 November 2011 until 1 September 2012 ' by then the supply of 200mmscfdof gas will commence from the Melacca regassification facility to the powersector.

- We remain positive on Tenaga due to:-

(1) Falling global coal and US-based natural gas prices,which will positively transform the company's cost structure. A US$10/tonnedecrease in coal costs will raise FY13F net profit by 14%.

(2) Likelihood that Petronas and the government willcontinue to bear the higher liquefied natural gas costs from the Melaccaregassification plant in the near term (due to political factors), which couldmitigate further fuel cost pressures. 

(3) New plant-ups to replace the first generationindependent power producers, with expiring power purchase agreements likely toreduce capacity payments. In an open tender environment with Tenaga as thebidder and sole offtaker, fixed power purchase costs are likely to decline.

- The stock currently 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 bandof 10x-16x.  

Source: AmeSecurities