News    Tenaga Nasional Bhd (“TENAGA”) announced yesterday that it had received the Letter of Award from the Energy Commission on the development of a New Power Generation Capacity (Fast Track Project 3A 1000MW) with the following conditions:

i) A project company will be incorporated as a wholly owned subsidiary to undertake the project,

ii) The execution of the relevant project documents by the project company to be no later than 14 Aug-23; and

iii) The financial close for the project is expected to be no later than 2 Jan-14

Comments    No surprises here as TENAGA was earlier selected as the Preferred Bidder for this 1,000MW coal-fired Power Plant in Manjung, Perak in an international competitive bidding. While the PPA is still under negotiation,  we understand that it won the project for its lowest bid of c.22 sen/kWh. The total cost for this power plant is estimated at RM5b.

This project will take 45 months before the commercial operation date of 1 Oct-17. Besides this, TENAGA has four other power plants under construction, namely the 1,000MW Janamanjung Unit 4 (COD: 31 Mar-15), 265MW Hulu Terengganu Hydro (Sep-15 for U1; Dec-15 for U2), 372MW Ulu Jelai Hydro (Dec-15 for U1; Mar-16 for U2) and 1,070MW Prai (Jan-16). This will bring TENAGA’s total installed capacity to 12,748MW by 2017 from 9,041MW currently, accounting for 58% of the Peninsular Malaysia’s total installed capacity.

With regard to the statement that TENAGA has unfair advantage over IPPs in new power plant tenders, we believe TENAGA should continue to bid for new projects, which will make the bidding process competitive thus offer cost effectiveness in relation to power generation, which ultimately benefits the consumers. 

Outlook    When a new set of fuel cost pass-through mechanism is in place, TENAGA earnings are expected to stabilise. By then, its financial performance then will depend mainly on its operational efficiency. 

Forecast    No changes to our FY13-15 estimates as the new earnings from this project are only expected to kick start in 2017, which is beyond our estimate horizon. 

Rating    Maintain OUTPERFORM and TOP PICK for the power sector on unchanged CY14 14x PER.

Valuation     Our target price is maintained at RM10.48/share, based

Risks    The government’s ability to continue its compensation (or via a stabilisation fund) before the fuel cost passthrough tariff kicks in. 

Source: Kenanga