Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD
Research House: RHB
Tenaga Nasional Bhd
(March 14, RM6.03)
Maintain market perform at RM6.20 with fair value RM6.90: The government has been rolling back subsidies on items such as fuel, and management believes gas could be next. This is more so given the government's decision to freeze toll hikes for the next five years. In fact, gas is the government's second largest subsidy at RM13.6 billion in 2009, after education (RM31.4 billion). Recall the government's assurance that any increase in gas price will be accompanied with a tariff increase. The odds of a tariff review, however, could be diminished by political interference, we believe.
Management reiterated its guidance of 5%-6% electricity demand growth for FY11. Year-to-date, i.e. September 2010-January 2011, electricity demand growth of 3.8% was tepid due to a seasonally weak January (due to December holidays) and a high base effect in FY10. However, management expects growth to pick up for the remainder of FY11 from March onwards.
Management kept its FY11 average coal cost guidance of US$110 per tonne (RM334). As at last week, coal prices stood at US$130 per tonne, creeping back towards the US$138 peak seen in January. However, we understand from management that coal prices are seasonally higher during the March-April period as Japanese energy utilities lock in their coal supply. Subsequently, management expects coal prices to trend lower.
We gather that Tenaga may not necessarily be able to use more gas as part of its fuel mix (subsidised gas is cheaper than coal market price) despite the recent major oil and gas discoveries offshore Sarawak by Petroliam Nasional Bhd (Petronas). Petronas has little incentive to supply gas at subsidised prices to Tenaga when it can export at higher market prices. Preliminary evaluation by Petronas indicates around 100 million barrels of oil and 200 billion standard cubic feet of gas in place.
Despite some criticism in the media, Tenaga is firm that nuclear power is needed to address future energy needs as the cheapest source of power in the long run. Malaysia may deplete its natural gas reserves in two years (excluding Sarawak discovery) while the volatility of coal prices is hurting Tenaga's profitability. We gather that a nuclear power plant, tentatively to be commissioned by 2021, may cost RM20 billion and would largely be government-funded.
Risks include: 1) slower-than-expected demand growth; 2) depreciating ringgit; and 3) rise in coal prices.
We have left our earnings forecasts unchanged.
We maintain our indicative fair value of RM6.90 based on unchanged target CY11 PER of 13 times. Tenaga lacks catalysts due to slowing electricity demand growth of 5.5% for FY11 (FY10: 8.8%) and no clear timeline for a formal fuel cost pass-through formula to help address the issue of fluctuating fuel prices. Maintain market perform. ' RHB Research, March 14
This article appeared in The Edge Financial Daily, March 15, 2011.
Company Name: TENAGA NASIONAL BHD
Research House: RHB
Tenaga Nasional Bhd
(March 14, RM6.03)
Maintain market perform at RM6.20 with fair value RM6.90: The government has been rolling back subsidies on items such as fuel, and management believes gas could be next. This is more so given the government's decision to freeze toll hikes for the next five years. In fact, gas is the government's second largest subsidy at RM13.6 billion in 2009, after education (RM31.4 billion). Recall the government's assurance that any increase in gas price will be accompanied with a tariff increase. The odds of a tariff review, however, could be diminished by political interference, we believe.
Management reiterated its guidance of 5%-6% electricity demand growth for FY11. Year-to-date, i.e. September 2010-January 2011, electricity demand growth of 3.8% was tepid due to a seasonally weak January (due to December holidays) and a high base effect in FY10. However, management expects growth to pick up for the remainder of FY11 from March onwards.
Management kept its FY11 average coal cost guidance of US$110 per tonne (RM334). As at last week, coal prices stood at US$130 per tonne, creeping back towards the US$138 peak seen in January. However, we understand from management that coal prices are seasonally higher during the March-April period as Japanese energy utilities lock in their coal supply. Subsequently, management expects coal prices to trend lower.
We gather that Tenaga may not necessarily be able to use more gas as part of its fuel mix (subsidised gas is cheaper than coal market price) despite the recent major oil and gas discoveries offshore Sarawak by Petroliam Nasional Bhd (Petronas). Petronas has little incentive to supply gas at subsidised prices to Tenaga when it can export at higher market prices. Preliminary evaluation by Petronas indicates around 100 million barrels of oil and 200 billion standard cubic feet of gas in place.
Despite some criticism in the media, Tenaga is firm that nuclear power is needed to address future energy needs as the cheapest source of power in the long run. Malaysia may deplete its natural gas reserves in two years (excluding Sarawak discovery) while the volatility of coal prices is hurting Tenaga's profitability. We gather that a nuclear power plant, tentatively to be commissioned by 2021, may cost RM20 billion and would largely be government-funded.
Risks include: 1) slower-than-expected demand growth; 2) depreciating ringgit; and 3) rise in coal prices.
We have left our earnings forecasts unchanged.
We maintain our indicative fair value of RM6.90 based on unchanged target CY11 PER of 13 times. Tenaga lacks catalysts due to slowing electricity demand growth of 5.5% for FY11 (FY10: 8.8%) and no clear timeline for a formal fuel cost pass-through formula to help address the issue of fluctuating fuel prices. Maintain market perform. ' RHB Research, March 14
This article appeared in The Edge Financial Daily, March 15, 2011.
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