The coal plant outages are continuing into May 2014, Tenaga would likely attempt to claw back higher fuel costs.

We continue to expect some form of announcement on the Jul 2014 tariff review (with a potential hike of up to 3.5%).

Reiterate BUY with an unchanged MYR14.00 TP. Tenaga remains our top sector pick.

What’s New

The coal plant outages in Peninsular Malaysia have continued into May 2014, meaning Tenaga’s present usage of costlier LNG-sourced gas is likely higher than budgeted. We understand Tenaga would seek to claw back these higher fuel costs.

A scheduled tariff review for the pass-through of fuel-costs is supposed to be effective Jul 2014. Ten days into Jun 2014, the regulator has yet to announce any tariff changes.

What’s Our View

Under an optimistic scenario to Tenaga (400mmscfd of LNG-sourced gas, MYR45/mmBTU LNG-sourced gas price, USD75/t coal price), we estimate a potential hike of up to 3.5% in the Jul 2014 tariff.

In our view, the quantum of the Jul 2014 tariff is secondary. What is more important is for the Energy Commission to make a statement, so as to signal to the market that the fuel-cost passthrough mechanism is in place. This remains our base case.

We continue to be bullish on TNB, as we believe investors have yet to price in the company’s longer-term earnings growth potential. Present expectations merely revolve around a stable earnings base under the incentive-based regulation (IBR) framework, in our view.

We value TNB using a DCF, assuming 7.2% WACC and 1% long-term growth. Our target price implies a FY15 P/B of 1.9x and PER of 14.8x.

Source: Maybank Research - 10 Jun 2014