- We maintain our BUY call on Tenaga Nasional with an unchanged DCF-derived fair value of RM16.30/share, which implies a PE of 14x and a P/BV of 1.9x.

- According to the Budget 2015 revision announced yesterday, electricity tariffs are expected to remain status quo in 2015 as the government has decided to defer the scheduled (six-monthly) tariff hikes for 2015.

- This measure – together with a similar postponement in the industrial sector’s scheduled gas price hike – is aimed at increasing private investments by improving the cost structure of commercial and industrial players.

- This latest decision follows the November 2014 announcement by the Energy, Green Technology and Water Minister Datuk Seri Dr Maximus Ongkili, who said that the existing electricity tariffs will be maintained until June 2015.

- Although the electricity tariff was left unchanged at that time, the government had allowed savings from the reduction in capacity charge for the Gen-1 PPAs to be used to offset Tenaga’s cost under-recovery which amounted to ~RM600mil in FY14.

- The under-recovery was mainly due to the higher price of liquefied natural gas at RM47/mmbtu compared to the tariff threshold of RM41.68/mmbtu. This was despite FY14 coal costs of USD75.40/tonne being below the tariff’s assumption of USD87.50/tonne (at exchange rate of RM3.14/USD).

- The government’s move is in line with its earlier proposal to use the savings, which have been kept in a special account at the disposal of the Energy Commission, as part of a fuel stabilisation fund. The balance of PPA savings is estimated to be RM170mil after deducting the ICPT costs needed to maintain the current tariffs.

- In our view, the postponement of electricity tariffs is not surprising given:- (1) expectations of a strong performance from Tenaga amidst moderating fuel cost; (2) the government’s intention to ensure a sustainable economy; and (3) the availability of the stabilisation fund to compensate for under-recoveries. Market expectations, if any, were for tariff reductions this year.

- The deferral in tariff adjustment does not change our FY15FFY17F earnings and fair value as our projections do not incorporate any hikes.

- Valuation-wise, the stock currently trades at a P/BV of 1.7x, which is within its 1.1x-2.0x range over the past 5 years. Tenaga also offers an attractive FY15F PE of 12.4x, compared with the stock’s three-year band of 10x-16x.

Source: AmeSecurities