AmWatch - Tenaga Nasional : Government cuts tariffs BUY, 12 Feb 2015

STOCK FOCUS OF THE DAY

Tenaga Nasional : Government cuts tariffs           BUY

We maintain BUY on Tenaga Nasional but lower our DCF-derived fair value from RM18.40/share to RM17.00/share. Our fair value implies an FY15F PE of 15x and a P/BV of 2.0x. This follows the government’s decision yesterday to lower power tariffs for Peninsular Malaysia (-2.52sen/kWh or -5.8%) and Sabah (-1.20sen/kWh or -3.5%) effective 1 March to 30 June 2015. We expect the next review to take place in July this year.

Residential consumers who utilise more than 300kWh per month (~29% of total domestic consumers) as well as commercial and industrial consumers will stand to benefit from the cut. The tariff reduction stems from the availability of Imbalance Cost Pass Through (ICPT) savings of RM727mil, amid lower feedstock costs. We opine that the tariff reduction will be earnings neutral to Tenaga premised on its fuel/tariff benchmark rates given that adjustments are now determined through the Incentive Based Regulation (IBR) framework and ICPT mechanism.

This essentially means that the government can increase or reduce electricity rates based on the underlying prices of coal and gas. In other words, it will not only shield Tenaga’s earnings from spikes in fuel prices, but also removes its “supernormal” profits in times of low input costs, as presently. We have revised upwards our fuel cost assumptions from market prices to the benchmark rates – from USD65/tonne to USD87.50/tonne for coal and from RM40/mmbtu to RM41.68/mmbtu for LNG. That said, we anticipate the decline in earnings from the costs revision to be mitigated by a potential rise in electricity demand. We have thus increased our demand growth assumption from 3% to 4%.

Accounting for both adjustments, we have cut Tenaga’s FY15F-FY17F earnings by 16%-21%. The stock offers an attractive FY15F PE of 12.5x, which is in the mid-range of its 3-year PE band of 10x-16x. We believe that Tenaga’s valuation will be well supported by its more stable and smoother earnings profile moving forward.

Others :

MSM Malaysia : Robust sales volume in 4QFY14 BUY

Benalec Holdings : Has its work cut out   BUY

Westports Holdings : Long-term prospects intact, tariff hike still in play   HOLD

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