OSK maintains buy on Tenaga

Written by Financial Daily
Tuesday, 27 October 2009 11:08

OSK Research has maintained its buy call on TENAGA NASIONAL BHD [] at RM8.46, with a target price of RM9.38 based on a forward price-earnings ratio (PER) of 12.1 times following the announcement of a partnership with Indonesia’s Perusahaan Listrik Negara (PLN) to study linking electricity between Peninsular Malaysia and Sumatra.

In its announcement yesterday, Tenaga said the parties aimed to initiate and formalise an arrangement to realise the implementation of the Peninsular Malaysia-Indonesia project subject to technical, commercial and financial feasibility of the project for each party.

OSK Research said the estimated cost for the project was RM2 billion with work starting in 2012 and targeted for completion in three years. The outlay for Tenaga is expected to be around RM67 million annually as its stake in the project was likely to be held as an associate.

“Assuming that both Tenaga and PLN take up only associate stakes in the interconnection and a maximum cost of RM2 billion spread over three years with 25% equity financing, (the RM67 million annual investment) would be well within its cash flow capability of almost RM7 billion a year,” it said in a note yesterday.

OSK added the interconnection was aimed at strengthening the networks across Asean with Tenaga having the opportunity to export electricity to parts of Indonesia given the shortage of power there and excess capacity within the country.

“Tenaga will get to export electricity to Sumatra but must negotiate better rates than those it has with Thailand,” said the research house.

“The rates to Thailand are an estimated 20.1 sen per kWh compared with its overall tariff of 32.3 sen per kWh. With the higher cost of coal, it is currently uneconomical to export electricity to Thailand and exports have dropped off significantly.

“The interconnection will have a capacity of 600MW and comprise two 200km lines of overhead 250kV high voltage direct current (HVDC) and two 57km submarine cables,” it said.

OSK Research said the partnership was in line with the long-planned Asean grid to connect the electricity networks of partner countries.

Key components of the grid include the Bakun Energy Transmission Grid (BETG), undersea cables from Peninsular Malaysia to Sumatra and cables from Sabah to the Philippines. The Malaysia-Sumatra interconnection would have a smaller capacity than BETG’s 2000MW.

“Also, its 200km overhead lines are only a fifth of the BETG’s 1038km and over gentler terrain while the 57km of submarine cables is also much shorter than BETG’s 676km,” said the research house.

“With Budget 2010 explicitly stating that Tenaga’s capex will be RM5 billion accompanied by a subsidy reduction as part of its theme, we believe a tariff hike in January 2010 is in the cards,” OSK Research said.

It said the tariff hike in gas prices would be translated to higher electricity prices for Malaysians following subsidy reductions stated in Budget 2010 and this was an added impetus to buy the utility company’s shares.

Tenaga added two sen to close at RM8.48 yesterday.


This article appeared in The Edge Financial Daily, October 27, 2009.