When is a good time to buy Tenaga?

Tenaga Nasional Bhd
(Dec 30, RM8.37)
Maintain buy at RM8.36 with target price of RM9.76: Tenaga Nasional’s (Tenaga) share price has dipped since it reached a high in September, dragged down by rising coal prices as the La Nina weather phenomenon caused unprecedented rainfall and floods in Australia’s coal mining regions.

Nonetheless, even if we raised our coal cost assumption from US$100 (RM307) to US$110 per tonne, which cuts our profit forecast by between 4% and 15.6%, our discounted cash flow (DCF) fair value is still maintained at RM9.76 as the lower share price leads to a lower WACC. However, the question then remains: “When to buy TNB?”

Looking at Tenaga’s recently released October demand numbers, year-to-date (September and October) electricity demand still grew 4.6%, which is close to our full-year forecast 4.9%.

As Tenaga’s share price has not really reacted to its one-for-four bonus issue, which goes ex on Dec 31, we do not see this as a major catalyst to buy. Rather, our sensitivity analysis shows that Tenaga is most sensitive to tariff adjustments, with a 1% tariff hike raising profits by RM229 million compared with RM49 million for a 1% drop in coal price and RM47 million for a 1% strengthening of the ringgit.

As such, as a tariff hike is long overdue for Tenaga, the current tariffs only account for coal cost of up to US$85 per tonne compared with the current US$$115, investors should buy closer to the date of tariff increase.

We continue to hold the view that Tenaga is unlikely to secure a tariff hike apart from an overall subsidy reduction on gas prices. We also believe that such a reduction would only happen after the next general election.

For now, our DCF fair value remains at RM9.76 even as we raise our coal price assumption, and Tenaga remains a buy recommendation. — OSK Investment Research, Dec 30