Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD
Research House: OSK
Tenaga Nasional Bhd
(Jan 21: RM6.51)
Maintain buy, fair value at RM7.74: Tenaga Nasional Bhd's (TNB) 1QFY11 core net profit came in above our forecast and consensus as we expect the subsequent quarters to be poorer due to rising coal prices.
While demand growth still looks reasonable at above 4.5% and coal prices may retreat after February, the lack of transparency in terms of a tariff hike to cover the high coal prices may likely dampen demand for TNB shares despite the 98% quarter-on-quarter profit jump.
Nonetheless, based on our longer term valuation and view, TNB remains a 'buy', with longer term expectations for an 8% tariff hike and its sensitivity of a 9.5% profit jump for every 1% increase in tariff. In the shorter term, coal prices may have been fully factored in and TNB may stage a mild rebound.
TNB's core net profit for 1QFY11 of RM819.2 million was significantly above our expectations and consensus as we have built in expectations of higher coal costs in the subsequent quarters given the disruptions in Australian coal supply.
For 1Q alone, year-on-year core net profit rose 9%, lifted by higher interest income as TNB's cash pile increased and with net gearing dropping to 40.7%. On a quarter-on-quarter basis, there was an impressive 98% jump as a mixture of lumpy costs in the previous quarter and lower coal prices in 1Q boosted core net profit.
While management concurs with us that coal prices should drop past February as flood damage is repaired and the winter weather eases, we still stick to our coal cost of US$120 (RM367.20) per tonne for FY11 against management's guidance for US$110.
At the same time, we tweak our generation mix forecast more towards coal as we understand that the fire at the Bekok gas platform offshore Terengganu has caused a cut in gas supply from 1,250 mmscfd to 1,100 mmscfd.
As demand growth on the industrial side has trailed behind expectations while growth on the domestic side surprised, we tweak our growth mix accordingly but overall growth is still forecast at 4.9%.
At the same time, our tweaked generation mix leads to a FY11 earnings cut of 1.3% and FY12 to FY13 by less than 0.2%.
We maintain fair value at RM7.74. With power purchase agreement'' re-negotiations and tariff reviews ongoing, TNB may well secure a tariff hike as and when gas subsidies are cut.
We believe this could happen either this month or at the next review in June, with the June timeline likely more plausible.
With our sensitivity analysis still showing a 9.5% sensitivity to tariff and only 2% to coal prices, we maintain our 'buy' call on TNB although its share price remains hostage to factors largely out of its control, such as the government's decision to cut subsidies and rising global coal prices. ' OSK Research, Jan 21
This article appeared in The Edge Financial Daily, January 24, 2011.
Company Name: TENAGA NASIONAL BHD
Research House: OSK
Tenaga Nasional Bhd
(Jan 21: RM6.51)
Maintain buy, fair value at RM7.74: Tenaga Nasional Bhd's (TNB) 1QFY11 core net profit came in above our forecast and consensus as we expect the subsequent quarters to be poorer due to rising coal prices.
While demand growth still looks reasonable at above 4.5% and coal prices may retreat after February, the lack of transparency in terms of a tariff hike to cover the high coal prices may likely dampen demand for TNB shares despite the 98% quarter-on-quarter profit jump.
Nonetheless, based on our longer term valuation and view, TNB remains a 'buy', with longer term expectations for an 8% tariff hike and its sensitivity of a 9.5% profit jump for every 1% increase in tariff. In the shorter term, coal prices may have been fully factored in and TNB may stage a mild rebound.
TNB's core net profit for 1QFY11 of RM819.2 million was significantly above our expectations and consensus as we have built in expectations of higher coal costs in the subsequent quarters given the disruptions in Australian coal supply.
For 1Q alone, year-on-year core net profit rose 9%, lifted by higher interest income as TNB's cash pile increased and with net gearing dropping to 40.7%. On a quarter-on-quarter basis, there was an impressive 98% jump as a mixture of lumpy costs in the previous quarter and lower coal prices in 1Q boosted core net profit.
While management concurs with us that coal prices should drop past February as flood damage is repaired and the winter weather eases, we still stick to our coal cost of US$120 (RM367.20) per tonne for FY11 against management's guidance for US$110.
At the same time, we tweak our generation mix forecast more towards coal as we understand that the fire at the Bekok gas platform offshore Terengganu has caused a cut in gas supply from 1,250 mmscfd to 1,100 mmscfd.
As demand growth on the industrial side has trailed behind expectations while growth on the domestic side surprised, we tweak our growth mix accordingly but overall growth is still forecast at 4.9%.
At the same time, our tweaked generation mix leads to a FY11 earnings cut of 1.3% and FY12 to FY13 by less than 0.2%.
We maintain fair value at RM7.74. With power purchase agreement'' re-negotiations and tariff reviews ongoing, TNB may well secure a tariff hike as and when gas subsidies are cut.
We believe this could happen either this month or at the next review in June, with the June timeline likely more plausible.
With our sensitivity analysis still showing a 9.5% sensitivity to tariff and only 2% to coal prices, we maintain our 'buy' call on TNB although its share price remains hostage to factors largely out of its control, such as the government's decision to cut subsidies and rising global coal prices. ' OSK Research, Jan 21
This article appeared in The Edge Financial Daily, January 24, 2011.
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