TENAGA: Forex gains drive TNB’s 3Q net profit to RM1.1b

A stronger ringgit drove Tenaga Nasional Bhd’s (TNB) net profit to a record RM1.1 billion for the third quarter of its financial year ending Aug 31, 2010.

Forex translation gains accounted for more than half (51.4%) of its 3QFY10 net profit due to the strengthening of the ringgit versus the US dollar and the Japanese yen during the April 2010–May 2010 period. The bulk of TNB’s debts are denominated in these two currencies.

“During the third quarter (3Q), there was considerable volatility in the forex currency market which resulted in a stronger ringgit against US dollar and Japanese yen, and this contributed to the group’s forex translation gain of RM569.1 million,” said TNB CEO Datuk Seri Che Khalib Mohamad Noh yesterday at its press conference.

A stronger ringgit would mean that TNB would have to fork out less to pay interest on these foreign currency debts which it had earlier borrowed from abroad.

TNB has RM5.12 billion debt denominated in Japanese yen and RM4.79 billion of borrowings in the US dollar, it said in its notes to its 3Q financial statements.

Notwithstanding the stronger local currency unit, TNB also saw its 3Q revenues rising to RM7.723 billion from RM7.389 billion in 2Q due to higher electricity demand.

TNB said electricity demand growth in Peninsular Malaysia grew 3.7% quarter-on-quarter in 3Q while for the nine-month period of FY2010, electricity demand growth recorded a stronger growth of 9.9% compared to the previous year.

“A new peak demand level has been recorded in the peninsula, on May 24, 2010, at 15,072 megawatts representing an increase of 5.8% from FY09’s peak demand. The industrial and commercial sectors continued to record a strong growth of 11.7% and 7.9% respectively,” TNB chairman Tan Sri Leo Moggie said.

“On further year-on-year analysis of the industrial sector growth, the petrochemical and iron and steel sectors recorded the highest increase in electricity unit sales of 17.1% and 31.2% respectively,” Moggie added.

“In the third quarter, we were faced with stronger electricity demand growth and this demand was met by higher generation from coal-fired power plants,” Che Khalib said.

However, rising revenues were not matched with higher operating profits, but instead operating profits recorded a drop to RM904.5 million from RM1.32 billion in 3Q from 2QFY10.

“The higher cost of coal generation was the principal reason for the 31.5% decline in operating profits compared to the second quarter and accounted for the decline in earnings before interest, taxes, depreciation and amortisation (EBITDA) margin to 23.3%,” Che Khalib said.

“The upward trend in coal prices has started to erode our margins, but with the strengthening of the ringgit against the US dollar, the impact has been cushioned.”

Che Khalib also said the average coal cost for 3Q was US$91.60 (RM293.12) per tonne. He explained that coal prices had been on an upward trend since 1QFY10.

“We had a good start, in the first quarter (it was) roughly about US$80, the second quarter about US$82; over the last three months, it kept on rising. I would think for the whole (financial) year, the average would be about US$90,” Che Khalib said.

“Coal prices of late have been going up, that worries us. We hope the price remains the same, but if it continues (to rise), then it will definitely hurt our bottomline”.

TNB hedges by buying its coal supplies to fire up its coal power plants on a three-month forward basis. It had already bought forward coal supplies for 4Q at US$95 – US$96 per tonne, said Che Khalib.

Che Khalib said profitability for 4Q would be “less than” the 3Q because of higher coal prices.

Meanwhile, for the entire financial year, Che Khalib said TNB hoped to be able to “maintain the level of profitability as what we had achieved over the last three quarters”.

On another matter, Che Khalib said TNB would be participating in the open tender for the expansion of its Janamanjung plant, adding that “to say that we will definitely get it, I can’t confirm it to you; but what we can say is that we’ll put in a very competitive bid for this additional 1,000 megawatts”.

Recently, Prime Minister Datuk Seri Najib Razak announced that the government would be allocating RM63 billion over the next five years for infrastructure and development projects, which would also include coal-fired power plants.

In a report yesterday, ECM Libra Investment Research estimated that every 10% appreciation in the ringgit would accrete 13% to TNB’s earnings.

ECM Libra, which rates the stock a buy, said: “We still like TNB for its low foreign shareholding of 9% which limits downside risks and potential for tariff increases in tandem with the subsidy rationalisation programme.”

The counter added 13 sen to close at RM8.61 yesterday.


This article appeared in The Edge Financial Daily, July 15, 2010.