TENAGA : Maintain BUY at RM8.82 with higher TP of RM10.10 (from RM9.90)

Tenaga — no tripping this power player

Tenaga Nasional Bhd
(Oct 1, RM8.82)
Maintain buy at RM8.82 with higher target price of RM10.10 (from RM9.90): Tenaga is due to release its 4QFY2010 results in mid-October. We understand that FY2010 core net profit will come in within expectations at RM2.6 billion to RM2.7 billion, the second highest in its history. This implies 4QFY2010 core net profit of RM500 million to RM600 million, relatively unchanged quarter-on-quarter as the average coal price remains above US$90/MT (metric tonne). Thanks to the strengthening ringgit against the US dollar (Aug 31, 2010: RM3.15), Tenaga will also record FY2010 forex gains of RM600 million to RM700 million.

We also understand that the slower July unit demand growth of 6% year-on-year was due to lower steel smelting activities, but we are not overtly concerned as we believe that the steel sector is on the cusp of an up-cycle driven by building projects in the US and capacity cuts in China. On the cost front, coal prices have remained relatively benign at US$93/MT (US$78/MT FOB + US$15/MT freight cost), easing off the recent high of US$100/MT.

We revise our FY2011 and FY2012 unit demand growth assumption upwards from 3% to 4%. This is still at the lower end of management guidance of 4% to 5% or one time real GDP growth. The average coal price assumption in US dollars is raised from US$90/MT to US$95/MT, but as the US dollar-ringgit exchange rate is now below RM3.10 against our initial RM3.30 assumption the average coal price assumption in ringgit remains relatively stable at slightly under RM300/MT. Net impact is to raise net profit estimates by 5% and 8%.

We tweak our target price (TP) from RM9.90 to RM10.10 based on 15 times FY2011 PER. Our TP is reinforced as it implies a decent 23% discount to end-FY2011 discounted cash flow-based TP of RM13.08 (WACC: 9.5%, TGR: 3%).

Foreign shareholding is still rather tepid at 11%, so we anticipate further upside potential on foreign buying when the re-rating catalysts materialise and the subsidy rationalisation programme actually comes to pass. At 13 times one-year forward PER, it is trading at only two times higher than the recent trough. Therefore, we still rate Tenaga as a “buy”. — ECM Libra Investment Research, Oct 1

This article appeared in The Edge Financial Daily, October 4, 2010.