At the finishing line for Project 3A

-A +A

Tenaga Nasional Bhd (July 17, RM8.85) Maintain trading buy at RM8.62 with a target price of RM9.52: TNB announced that it has received notification from the Energy Commission (EC) that it has been selected as the preferred bidder for Project 3A involving a 1,000MW coal-fired plant in Manjung, Perak.

The project’s duration is for 45 months with its commercial operational date targeted for October 2017. A letter of award will be issued upon successful negotiations in respect of the bid, project documents and the proposed offset programme.

We are not entirely surprised that TNB has won the bid with the only other shortlisted contender being 1Malaysia Development Bhd (1MDB). News reports earlier this month revealed that TNB’s bid was at 22 sen per kwh, compared to 1MDB’s 24sen per kwh.

Project 3A is the second competitive bidding process implemented by the Energy Commission for new generation capacity. The first was Track 1 for the 1,071MW gas-fired plant in Prai, which was also won by TNB in October last year. Given TNB’s size and stronger balance sheet relative to other independent power producers, it clearly has an edge in offering more competitive rates.

Project 3A will add another 1,000MW to TNB’s current installed capacity of 9,041MW (end-2012 financial year [FY12]). On top of Project 3A, additional generation capacity currently being planted by TNB include Janamanjung 1,000MW extension (to be completed in March 2015), Hulu Terengganu 250MW (October 2015), Prai 1,071MW (January 2016) and Ulu Jelai 372MW (July 2016).

We expect the development cost for Project 3A to be about RM5 billion, similar to that of the 1,000MW Janamanjung extension.

Project 3A could potentially add RM1.25 billion per annum in capital expenditure (capex) to FY14-FY17 (FY12: RM7.3 billion). We have assumed RM6 billion in capex per annum for FY13 to FY15.

No changes to our estimates for now, pending clarity on the actual project cost of 3A.

We maintain our “trading buy” rating on TNB with an unchanged target price of RM9.52 based on FCFF which applies an 8% weighted average cost of capital and a 3% terminal growth. This implies FY13 and FY14 price-earnings ratio of 17.2 times and 12.5 times respectively.

Key catalysts include: (i) normalisation of gas supply to the power sector following the commencement of the Melaka regasification terminal; and (ii) approval of the proposed incentive based regulation in August which should pave way for the fuel cost pass through mechanism to be implemented next year. — Alliance Research, July 17 This article first appeared in The Edge Financial Daily, on July 18, 2013.