Tenaga Nasional Bhd
(April 15, RM11.92)
Maintain buy with target price of RM14.90: TNB has signed a 25-year power purchase agreement to buy electricity from 1Malaysia Development Bhd’s (1MDB) proposed 50mw solar photovoltaic plant in Kedah, after direct negotiations with the energy, green technology and water ministry, Energy Commission and Sustainable Energy Development Authority Malaysia (Seda).

It was reported that 1MDB’s renewable energy (RE) tariff rates are between 40 sen and 46 sen per kWh, higher than TNB’s recently revised electricity tariff of 40 sen.

As for TNB’s results for the second half ended Feb 28 of financial year 2014 (2HFY14), scheduled to be released on April 24, we expect a sequentially weak quarter due to normalisation of tax rates and a one-month timing delay between the increase in gas costs in January and recognition of the tariff rate hike in February, as already forewarned on Jan 24.

The stock trades at a decent price-to-book value (P/BV) of 1.8 times, which is at the mid-range of adjusted 1.1 times to 2.7 times over the past five years. TNB also offers a decent calendar year 2014 (CY14) price-earnings ratio (PER) of 13 times, compared with the stock’s three-year average band of 10 to 16 times.

We maintain our “buy” call on TNB with an unchanged discounted cash flow-derived fair value of RM14.90 per share, which implies a CY14F PER of 16 times and a
P/BV of 2.4 times.

We maintain TNB’s FY14F to FY16F earnings, which will not be affected by additional payments for RE. — AmResearch, April 15

This article first appeared in The Edge Financial Daily, on April 16, 2014.