Tenaga Nasional Bhd(June 10, RM8.30) Maintain buy at RM8.39 with a fair value of RM9.15: We are maintaining our “buy” call on TNB, with an unchanged discounted cash flow-derived fair value of RM9.15 per share, which implies a 2014 financial year (FY14) forecast price-earnings ratio (PE) of 12 times and a price-to-book value (P/BV) of 1.5 times.
The Edge reported in its latest edition that TNB is the front runner for the tender of a 1,000MW brownfield coal-fired power plant — known as Fast Track Project 3A — edging out the only other bidder 1Malaysia Development Bhd (1MDB) by 2 sen/kWh.The financial weekly said TNB, together with its partner Marubeni Corp from Japan, put in a bid of 22.78 sen/kWh compared with 1MDB-Mitsui & Co’s 24.86/kWh. As the primary consideration in awarding a power consession by the Energy Commission is the cheapest rate, TNB looks set to secure the tender.The new 1,000mw plant is expected to commence operations in stages beginning October 2018. Recall that the site for this new plant is TNB’s existing 2,100mw Janamanjung plant in Manjung, Perak where another 1,000mw block will be ready in early 2015.We are not surprised that TNB had reportedly put in the lowest bid because, as indicated in our earlier reports, the power company remains the only offtaker for electricity generated in Peninsular Malaysia.As such, TNB is also likely to secure the next tender for the 2,000mw greenfield coal-fired plant called Project 3B, expected to be located in a new site. TNB has teamed up with China National Machinery Import & Export Corp to bid for Project 3B. There are four other bidders for the project, including 1MDB-Mitsui & Co, Formis Resources Bhd, YTL Power International Bhd and Malakoff Corp Bhd.Meanwhile, the upcoming commencement of the additional 150mmscfd of natural gas from the Lekas regasification plant in Melaka by this month is likely to provide greater earnings clarity for TNB, with a new electricity and gas tariff structure in place.With a more stable gas supply, now hovering around 1,100mmscfd (versus an allocated 1,250mmscfd) for the power sector, coupled with the proposed fuel stabilisation fund, we expect TNB’s improving earnings transparency to drive its rerating process further.With its foreign shareholding currently at 19% as at end-March this year versus its peak of 28% in 2007, the stock still trades at an attractive P/BV of 1.4 times — at the lower range of an adjusted 1.1 to 2.7 times over the past five years. TNB also offers an attractive FY14F PE of 11 times, compared with the stock’s three-year average band of 10 to 16 times. — AmResearch, June 10
This article first appeared in The Edge Financial Daily, on June 11, 2013.