Tenaga has received the greenlight for a long-awaited 7.2% tariff hike effective 1 June to cover for higher gas and operating costs. The government also announced plans to introduce a fuel cost pass-through (FCPT) mechanism for the power sector and 1% levy on feed-in tariff for the renewable energy fund. We view the FCPT as a positive surprise for Tenaga as it will lift worries over inconsistent tariff reviews and allow a transparent passthrough of fuel costs. In view of these positives, we are upgrading Tenaga from Neutral to TRADING BUY and raise our FY11-12 earnings by up to 16%. Our target price rises from RM6.82 to RM8.05 as we now apply a smaller discount of 30% (40% previously) to its historical average P/BV multiple of 2x in view of its improving prospects. Potential catalysts are this news and potential upgrades by brokers.
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TENAGA - BUY BUY BUY
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