Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD
Research House: MAYBANK
Tenaga Nasional Bhd
(April 7, RM6.19)
Maintain sell at RM6.18 with reduced target price RM5.73 (from RM6): We maintain Tenaga as a 'sell' due to the challenging business outlook stemming from high coal prices, a shortage of natural gas and the remote possibility of a tariff hike. We now use the earned value/earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) valuation metric (previously discounted cash flow) as we think it captures more accurately the true health of utility companies given their high gearing.
Our new target price of RM5.73 is based on 5.8 times FY12 EV/Ebitda ' consistent with its long-term average. This implies 12 times FY12 earnings, which we think is fair for its multiple challenges.
We have revised our power demand growth from +3.9% to +5% per year for the FY11/13, as per management's guidance of +5% to 6%, and to be in line with our GDP growth forecasts. This helps to boost utilisation rates and optimise fixed costs. But it also leaves Tenaga with a low reserve margin of 22% by end-2011 we estimate, compared with its historical norm of approximately 40%. Put into perspective, if two major power plants break down simultaneously, it would be disastrous for the country, and Tenaga too.
Raising FY11 coal estimates to an average US$115 (RM348.50) per tonne, previously US$110 per tonne, in light of higher market prices. The FY11-to-date price (Newcastle benchmark) is US$114 per tonne (+36.7% y-o-y), and the spot price is US$122 per tonne. We estimate this adds RM232 million in costs to FY11.
Tenaga receives approximately 1,000 mmscfd of gas, roughly 20% lower than its quota, due to supply chain problems. Petronas Gas Bhd will conduct a maintenance shutdown for 26 days in April and May; this is alarming as it is a peak electricity demand period. Gas supply will reduce (we think by 10% to 30%) and Tenaga will offset this by burning more coal and distillates. We estimate this will add RM175 million over the shutdown period, assuming a 30% gas supply shortfall.
We have raised our earnings forecasts by 6.3% for FY11, 60.3% for FY12 to account for higher power demand growth which more than offset the revised coal price average of US$115 per tonne in FY11 (unchanged US$100 per tonne in FY12). We assume no tariff hike. We caution that 2QFY11 results will be weak, which may allude to some downside in share price. ' Maybank IB Research, April 7
This article appeared in The Edge Financial Daily, April 8, 2011.
Company Name: TENAGA NASIONAL BHD
Research House: MAYBANK
Tenaga Nasional Bhd
(April 7, RM6.19)
Maintain sell at RM6.18 with reduced target price RM5.73 (from RM6): We maintain Tenaga as a 'sell' due to the challenging business outlook stemming from high coal prices, a shortage of natural gas and the remote possibility of a tariff hike. We now use the earned value/earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) valuation metric (previously discounted cash flow) as we think it captures more accurately the true health of utility companies given their high gearing.
Our new target price of RM5.73 is based on 5.8 times FY12 EV/Ebitda ' consistent with its long-term average. This implies 12 times FY12 earnings, which we think is fair for its multiple challenges.
We have revised our power demand growth from +3.9% to +5% per year for the FY11/13, as per management's guidance of +5% to 6%, and to be in line with our GDP growth forecasts. This helps to boost utilisation rates and optimise fixed costs. But it also leaves Tenaga with a low reserve margin of 22% by end-2011 we estimate, compared with its historical norm of approximately 40%. Put into perspective, if two major power plants break down simultaneously, it would be disastrous for the country, and Tenaga too.
Raising FY11 coal estimates to an average US$115 (RM348.50) per tonne, previously US$110 per tonne, in light of higher market prices. The FY11-to-date price (Newcastle benchmark) is US$114 per tonne (+36.7% y-o-y), and the spot price is US$122 per tonne. We estimate this adds RM232 million in costs to FY11.
Tenaga receives approximately 1,000 mmscfd of gas, roughly 20% lower than its quota, due to supply chain problems. Petronas Gas Bhd will conduct a maintenance shutdown for 26 days in April and May; this is alarming as it is a peak electricity demand period. Gas supply will reduce (we think by 10% to 30%) and Tenaga will offset this by burning more coal and distillates. We estimate this will add RM175 million over the shutdown period, assuming a 30% gas supply shortfall.
We have raised our earnings forecasts by 6.3% for FY11, 60.3% for FY12 to account for higher power demand growth which more than offset the revised coal price average of US$115 per tonne in FY11 (unchanged US$100 per tonne in FY12). We assume no tariff hike. We caution that 2QFY11 results will be weak, which may allude to some downside in share price. ' Maybank IB Research, April 7
This article appeared in The Edge Financial Daily, April 8, 2011.
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