Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD
Research House: MAYBANK
Tenaga Nasional Bhd
(March 17, RM7.95)
Maintain buy at RM7.95, target price lowered to RM11.80: Fluctuating power tariffs is the new economic reality. New fossil-fuel plants will be required to fulfil power demand growth in Peninsular Malaysia if Bakun power is not crossing over.
Coal and gas to fuel these plants will have to be imported at global prices subject to market vagaries. The sooner Malaysians accept this reality, the easier the adjustment. We expect the government to act sooner rather than later.
The New Economic Model (NEM) espouses innovation and creativity, which are encouraged by market forces and fair prices. Reinstating the tariff formula liberates the government and private sector.
The former can focus on nation building; the latter on efficiency gains instead of lobbying for energy subsidies which cannot be sustained.
Higher rates can be applied to rich, heavy consumers. Tenaga has locked in most of its coal needs for the financial year ending August 2010. The tariff formula can be reinstated without fuel cost pass-through adjustments. The opportunity can be used to introduce base tariffs to the public lexicon and implement a base-tariff hike for Tenaga.
A 5% hike would be equivalent to just 0.2% of Malaysia's some RM700 billion GDP, assuming users make no effort to reduce power consumption. The impact would be even smaller if efficiency measures are taken.
The NEM will be announced at Invest Malaysia on March 30-31. Tenaga's foreign shareholding has dwindled to 8% on continued tariff disappointments.
Overall foreign interest in the market is also waning. Restoring the tariff formula will send a strong signal that Malaysia will walk the talk, and help improve investor confidence.
We adjust our earnings forecasts following changes to our assumptions. Firstly, demand growth has rebounded sharply following the 3.2% contraction in FY ended Aug 2009.
Power demand has grown 5.2% in the five months to Jan 2010. Growth was broad based; and secondly, a 4% net tariff hike effective June 2010. We had previously assumed 2% per annum in March 2010 and 2011. However, we think conditions are right for the government to implement a base tariff hike.
We assume 4% and not 5%, as we think "under 5%" is a psychologically acceptable number for the public. 4% will be sufficient for Tenaga to recover the cost of capacity payments to new independent power producer Jimah.
Our discounted cash flow-based (DCF) target price falls to RM11.80 from RM12.10 as we make other longer-range adjustments to our earnings forecasts. We continue to use a 9.9% equity discount rate, based on a 4% risk-free rate, 6.5% market risk premium and 0.9 beta and 2% terminal growth rate assumption. Our target price is equivalent to 16 times FY11 earnings.
Without a tariff hike, our FY10-FY12 EPS (earnings per share) forecasts fall by 9%, 28% and 30% respectively, and DCF value would fall to RM9 per share. - Maybank IB, March 17 This article appeared in The Edge Financial Daily, March 18, 2010.
Company Name: TENAGA NASIONAL BHD
Research House: MAYBANK
Tenaga Nasional Bhd
(March 17, RM7.95)
Maintain buy at RM7.95, target price lowered to RM11.80: Fluctuating power tariffs is the new economic reality. New fossil-fuel plants will be required to fulfil power demand growth in Peninsular Malaysia if Bakun power is not crossing over.
Coal and gas to fuel these plants will have to be imported at global prices subject to market vagaries. The sooner Malaysians accept this reality, the easier the adjustment. We expect the government to act sooner rather than later.
The New Economic Model (NEM) espouses innovation and creativity, which are encouraged by market forces and fair prices. Reinstating the tariff formula liberates the government and private sector.
The former can focus on nation building; the latter on efficiency gains instead of lobbying for energy subsidies which cannot be sustained.
Higher rates can be applied to rich, heavy consumers. Tenaga has locked in most of its coal needs for the financial year ending August 2010. The tariff formula can be reinstated without fuel cost pass-through adjustments. The opportunity can be used to introduce base tariffs to the public lexicon and implement a base-tariff hike for Tenaga.
A 5% hike would be equivalent to just 0.2% of Malaysia's some RM700 billion GDP, assuming users make no effort to reduce power consumption. The impact would be even smaller if efficiency measures are taken.
The NEM will be announced at Invest Malaysia on March 30-31. Tenaga's foreign shareholding has dwindled to 8% on continued tariff disappointments.
Overall foreign interest in the market is also waning. Restoring the tariff formula will send a strong signal that Malaysia will walk the talk, and help improve investor confidence.
We adjust our earnings forecasts following changes to our assumptions. Firstly, demand growth has rebounded sharply following the 3.2% contraction in FY ended Aug 2009.
Power demand has grown 5.2% in the five months to Jan 2010. Growth was broad based; and secondly, a 4% net tariff hike effective June 2010. We had previously assumed 2% per annum in March 2010 and 2011. However, we think conditions are right for the government to implement a base tariff hike.
We assume 4% and not 5%, as we think "under 5%" is a psychologically acceptable number for the public. 4% will be sufficient for Tenaga to recover the cost of capacity payments to new independent power producer Jimah.
Our discounted cash flow-based (DCF) target price falls to RM11.80 from RM12.10 as we make other longer-range adjustments to our earnings forecasts. We continue to use a 9.9% equity discount rate, based on a 4% risk-free rate, 6.5% market risk premium and 0.9 beta and 2% terminal growth rate assumption. Our target price is equivalent to 16 times FY11 earnings.
Without a tariff hike, our FY10-FY12 EPS (earnings per share) forecasts fall by 9%, 28% and 30% respectively, and DCF value would fall to RM9 per share. - Maybank IB, March 17 This article appeared in The Edge Financial Daily, March 18, 2010.
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