KUALA LUMPUR Tenaga Nasional Bhd is poised to benefit from the recent developments and its current valuations have priced in the high coal cost and political risk for Malaysia, says HwangDBS Vickers Research.
The research house said on Wednesday Tenaga was trading at attractive price to earning of 9.0 times for the financial year ending Aug 31, 2009 (FY09) and 7.0 times for FY10 against the regional average PE of 19.0 times and 15 times respectively.
“Tenaga is also trading at its historical low price/net tangible asset (P/NTA) of 1.3 times. We reiterate our Buy rating with target price at RM9.90, based on two-year average PE of 10 times,” it said.
HwangDBS Vickers Research said Tenaga’s FY09-10 earnings prospect would hinge on the development of three issues.
The issues are Tenaga’s participation in the Bakun dam and undersea cable project; ipact of power purchase agreement (PPA) negotiation and potentially lower coal costs.
It said during a recent meeting with Tenaga management, it remained convinced that Tenaga would be a beneficiary of the ongoing PPA negotiations with potential cut in capacity payment, it was of the view the IPPs were likely to agree to lower capacity payments in return for a waiver of the recently imposed IPP windfall tax.
“We estimate that every 10% reduction in capacity payment will enhance Tenaga’s FY09 net profit by 7.0%,” it said.
On the Bakun dam project, it said Tenaga and Sarawak Energy Bhd had jointly submitted a bid to take over the Bakun hydroelectric dam and the undersea cable project.
It said the near term impact was minimal on Tenaga given the long gestation of the project, and development costs (including interest expense) were likely to be capitalised during the development phase.
“Tenaga will hold less than 50% stake in Bakun project and the debt will not be consolidated in Tenaga’s book.
"Over the longer term, we believe that the investment is likely to be earnings accretive given the plan to fund the project with cheaper source of funding and saving in fuel cost for Bakun’s hydro plant,” it said.
HwangDBS Vickers Research said the project risk was also relatively low as the construction of the plant was close to completion.
On the PPA negotiations, the research house said recent press reported that the IPPs have been given a deadline of June 2009 to conclude the renegotiation of their PPAs.
“We understand that the IPPs are looking into their respective PPAs and plan to submit the proposals for negotiation with the government and Tenaga by end 2008,” it added.
The PPA negotiation would relieve Tenaga on higher fuel cost. The ongoing PPA negotiation between the government, IPPs and Tenaga aims to address the concerns on Tenaga’s rising fuel cost as a result of high coal price with market rate at around US$145 per tonne against Tenaga’s FY8/08 average cost of US$75 per tonne.
HwangDBS Vickers Research said it came to understand that the Tenaga’s recent tariff hike effective July 1,2008 was sufficient to cover the increase in gas cost from RM6.40/mmbtu to RM14.31/mmbtu, and coal cost of up to US$75/MT.
However it cautioned that Tenaga’s earnings would be dragged down by high coal cost if it is unable to pass on the increase in fuel cost.