TENAGA results dampened by coal cost, provisions, fair value of RM10.20

Tenaga Nasional Bhd
(July 15, RM8.60)
Maintain outperform at RM8.61 with lower fair value of RM10.20 (from RM10.50): Excluding forex gains of RM573 million, Tenaga’s 3Q results were broadly in line with our and consensus estimates with 9MFY2010 core net profit of RM2.1 billion (+21.8% year-on-year) accounting for 70% to 73% of our and consensus FY2010 net profit forecasts.

We expect 4Q results to benefit from stronger demand (typically stronger in 4Q) as well as the absence of provision for vacated accounts of RM63 million booked in 3Q, partly offset by higher coal cost. As expected, Tenaga did not declare any dividend.

Quarter-on-quarter (q-o-q), electricity unit sales for Peninsular Malaysia rose 5.1% led by the domestic (+13.6% q-o-q) and commercial (+5.3% q-o-q) segments. The demand from the industrial segment was flattish q-o-q due to the shorter working period for February (reflected in March’s billings).

Core pre-tax profit, however, slipped by 37.6% q-o-q resulting from a combination of the abovementioned provision for vacated accounts and higher generation cost due to: (i) higher generation from coal-fired plants (3QFY2010: 43.6% of total generation against 2QFY2010: 36.9%); and (ii) higher average coal cost (3QFY2010: US$91.6/tonne against 2QFY2010: US$82.2/tonne). According to the management, gas supply was capped between 900 and 1,100mmscfd in 3Q due to scheduled maintenance. Gas supply in 4Q is likely to average similar levels.

Year-to-date (September 2009-June 2010) unit sales growth stood at +9.9% y-o-y, and with June electricity demand still up in double digits (+11% y-o-y) the management raised its FY2010 demand growth guidance to 10% from 7% to 8%. As for coal, pricing for the bulk of FY2010’s requirement has been locked in and is expected to average at an unchanged US$90/tonne. Finally, the implementation of Pemandu’s gas subsidy revision proposal is a matter of timing according to the management.

However, in addition to the revision in electricity tariffs for the higher gas price, the management believes this could be accompanied by a base tariff review and fuel cost pass-through formula. Both of these, if they materialise, would be a major re-rating catalyst for Tenaga.

Risks to our view include: (i) slower-than-expected demand growth; (ii) depreciating ringgit; and (iii) rise in coal prices.

We toned down our FY2010-12 net profit forecasts by 1.6% to 3.8% largely after adjusting for: (i) demand growth assumptions; (ii) generation mix; and (iii) provision for doubtful debts (FY2010).

Following the earnings revision above, our indicative fair value has been lowered to RM10.20 from RM10.50, based on target FY2011 PER of 13 times.

Outperform call on the stock, however, is unchanged. — RHB Research Institute, July 15


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