Tenaga Nasional Bhd
(June 19, RM12.86)
Maintain buy with unchanged target price of RM17.50: Tenaga Nasional Bhd’s (TNB) share price fell 4% on June 18 on news reports that TNB is taking over 1Malaysia Development Bhd’s (1MDB) entire stake in the Jimah power plant. Details are lacking, but we are cautiously optimistic. A possible higher levelised tariff and the imbalance cost pass-through (ICPT) mechanism would address the costs involved, in our view. Maintain “buy” on TNB with an unchanged target price of RM17.50.

We are cautiously optimistic about the possible TNB takeover of the 2,000mw Jimah coal-fired power plant (Track 3B project). Details are lacking, but reported comments made by the energy minister suggest that TNB is to take over 1MDB’s entire stake in the Track 3B project and seek a small revision for a higher levelised tariff to account for project delays and foreign exchange fluctuations. TNB may need to take into account its higher weighted average cost of capital (WACC) of 8% compared to 1MDB’s lower WACC (around mid-single digits).

TNB has only said it has yet to receive any official notification from the government. As it stands, Track 3B has an existing levelised tariff of 25.33 sen/kWh. Time is running short as the original commercial operation dates (split into two phases) are November 2018 and May 2019, which suggests that TNB would likely receive a higher tariff to prevent a power generation capacity shortfall. Track 3B was initially reported to cost RM11 billion. The remaining 30% in Track 3B will still be held by Mitsui Co Ltd.

We believe the ICPT mechanism would be used to address the potential higher tariff for Track 3B. In other words, the additional costs associated with Track 3B may  be passed on to consumers under the generation-specific cost adjustment portion of the ICPT. However, this may not necessarily translate into higher electricity tariffs going forward, as these costs may be offset by TNB’s over-recovery of fuel costs due to minimal use of expensive imported liquid natural gas and soft coal prices.

Pending further clarification from management, we maintain our “buy” rating on TNB with an unchanged discounted cash flow-based 12-month target price of RM17.50 (WACC: 8%, lomg-term growth: 3%). We still like TNB for: (i) decent electricity sales growth; (ii) benign coal prices and (iii) indirect ICPT implementation. However, the lack of clarity on Track 3B and persistent overhang from 1MDB bailout speculation are potential headwinds. — AffinHwang Capital Research, June 18

This article first appeared in The Edge Financial Daily, on June 22, 2015.