Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD
Research House: AMMB
Tenaga Nasional Bhd
(June 25, RM8.45)
Maintain buy at RM8.45 with unchanged fair value of RM10: We continue to like TNB due to the following:
(1)'' ''resurgence in power consumption growth which has risen by 10% year-on-year (y-o-y) in 8MFY10. Recall that TNB has registered an impressive consumption growth of 18% y-o-y in April this year (from 12% y-o-y in the previous month) to reach an all-time monthly consumption high of 7,929 Gwh.
(2)'' ''Stronger ringgit outlook, as a 10% ringgit appreciation can raise TNB's earnings by 12%. By the end of the year, our economist expects the ringgit to strengthen to RM3.10=US$1 vis-''-vis our FY10F-FY12F assumption of RM3.30=US$1.
(3)'' ''Improving economies of scale with declining power reserve margin ' at 45% this year. The declining reserve margin essentially means higher economies of scale as operating margins improve on the back of incremental revenues vis-a-vis the group's fixed expenditures. We estimate that every 1ppt increase in TNB's unit sales could lead to a 0.3% ppt improvement in FY11F net margin.
(4)'' ''Potential corporate moves such as bonus issue or higher dividend payout.
(5)'' ''Return of foreign investors to one of the most liquid stocks on Bursa Malaysia. Foreign shareholding has risen to 9.3% currently from 8.6% in February.
Key takeaways from a recent meeting with TNB's president/CEO Datuk Seri Che Khalib and fund managers is that any hikes in electricity or gas prices are unlikely this year given the government's uncertain political will in reducing subsidies.
Also, the government will continue to support TNB in ensuring that higher natural gas costs, if it occurs, will be fully passed through to consumers.
In addition, higher coal costs, around US$90 (RM290.70) per tonne vis-''-vis US$85 per tonne incorporated in the current tariff structure, is likely to be offset by a stronger ringgit.
As for the closed tender for the 2,000MW coal-fired power plant costing RM7 billion, it'' is likely to open in September. TNB has the advantage over the other two bidders given its cheap funding cost and willingness to accept a lower IRR compared with its contenders.
TNB's capex is likely to be around RM4-RM5 billion even with the construction of two hydropower plants in Pahang and Terengganu, given reduced spending of transmission and distribution.
The upcoming 9MFY10 results, expected to be announced on July 14, are likely to be in line with street estimates.
We reiterate our buy call on TNB with unchanged fair value of RM10 per share based on 10% discount to DCF of RM11.10 per share. Valuation-wise, TNB currently trades at an attractive CY10F PE of 11 times compared to its three-year average of 13 times with its peak of 18 times in 2007. ''' AmResearch, June 25
This article appeared in The Edge Financial Daily, June 28, 2010.
Company Name: TENAGA NASIONAL BHD
Research House: AMMB
Tenaga Nasional Bhd
(June 25, RM8.45)
Maintain buy at RM8.45 with unchanged fair value of RM10: We continue to like TNB due to the following:
(1)'' ''resurgence in power consumption growth which has risen by 10% year-on-year (y-o-y) in 8MFY10. Recall that TNB has registered an impressive consumption growth of 18% y-o-y in April this year (from 12% y-o-y in the previous month) to reach an all-time monthly consumption high of 7,929 Gwh.
(2)'' ''Stronger ringgit outlook, as a 10% ringgit appreciation can raise TNB's earnings by 12%. By the end of the year, our economist expects the ringgit to strengthen to RM3.10=US$1 vis-''-vis our FY10F-FY12F assumption of RM3.30=US$1.
(3)'' ''Improving economies of scale with declining power reserve margin ' at 45% this year. The declining reserve margin essentially means higher economies of scale as operating margins improve on the back of incremental revenues vis-a-vis the group's fixed expenditures. We estimate that every 1ppt increase in TNB's unit sales could lead to a 0.3% ppt improvement in FY11F net margin.
(4)'' ''Potential corporate moves such as bonus issue or higher dividend payout.
(5)'' ''Return of foreign investors to one of the most liquid stocks on Bursa Malaysia. Foreign shareholding has risen to 9.3% currently from 8.6% in February.
Key takeaways from a recent meeting with TNB's president/CEO Datuk Seri Che Khalib and fund managers is that any hikes in electricity or gas prices are unlikely this year given the government's uncertain political will in reducing subsidies.
Also, the government will continue to support TNB in ensuring that higher natural gas costs, if it occurs, will be fully passed through to consumers.
In addition, higher coal costs, around US$90 (RM290.70) per tonne vis-''-vis US$85 per tonne incorporated in the current tariff structure, is likely to be offset by a stronger ringgit.
As for the closed tender for the 2,000MW coal-fired power plant costing RM7 billion, it'' is likely to open in September. TNB has the advantage over the other two bidders given its cheap funding cost and willingness to accept a lower IRR compared with its contenders.
TNB's capex is likely to be around RM4-RM5 billion even with the construction of two hydropower plants in Pahang and Terengganu, given reduced spending of transmission and distribution.
The upcoming 9MFY10 results, expected to be announced on July 14, are likely to be in line with street estimates.
We reiterate our buy call on TNB with unchanged fair value of RM10 per share based on 10% discount to DCF of RM11.10 per share. Valuation-wise, TNB currently trades at an attractive CY10F PE of 11 times compared to its three-year average of 13 times with its peak of 18 times in 2007. ''' AmResearch, June 25
This article appeared in The Edge Financial Daily, June 28, 2010.
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