Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD
Tenaga Nasional Bhd
(Aug 22, RM5.49)
Maintain market perform at RM5.55 with revised fair value of RM6.10 (from RM6.50): The management has reiterated its 3% electricity demand growth guidance for FY11, which we think is somewhat optimistic. Year-to-date, September 2010 to July 2011, we estimate electricity demand growth of only 2.8%, due to weaker demand from industrial users on the back of headwinds in the global economy.
The management kept its FY11 average coal cost guidance of US$110 (RM327.80) per tonne. This is achievable as coal prices have stabilised, so we expect TNB's 4QFY11 to be similar, if not lower than 3QFY11 (US$109 per tonne).
Continued gas supply disruptions in 4QFY11 may lead to elevated generation costs (possibly close to those seen in 3QFY11) as TNB is forced to continue burning more expensive oil and distillate fuels (six times costlier than subsidised gas). The power company received on average only 900 mmscfd of gas in June and July, though the situation has improved to 1,000 mmscfd in August. This is still far short of TNB's usual gas supply of 1,250 mmscfd.
According to management, its oil plants have been running at full capacity in 4QFY11. However, distillate consumption in August has been reduced, in tandem with the marginal improvement in gas supply, but we do not rule out the possibility of more disruptions ahead.
The gas supply bypass for Petroliam Nasional Bhd's Bekok C field has been delayed from August to September, which will'' erode TNB's FY12 earnings. The management had said the expected completion has seen several delays, so the latest does not come as a surprise. The delay, however, clouds TNB's FY12 earnings visibility notwithstanding the full-year benefit of the 2% base tariff hike. We estimate every one month delay could erode FY12 earnings by RM250 million or 10%.
Risks include: (i) slower than expected demand growth; (ii) depreciating ringgit; and (iii) rise in coal prices.
Taking into account higher generation costs in 4QFY11, we have cut our FY11 earnings forecasts by 38%. We have also trimmed FY12 earnings by 9% to take into account the one-month delay for the bypass.
We believe TNB's prospects remain clouded by further delays for the Bekok C bypass, which could weigh heavily on FY12 earnings, despite the full-year benefit of the 2% base tariff hike. While TNB's losses may strengthen its case for a tariff adjustment for coal costs, we believe chances are slim after receiving a tariff hike in June and potential political interference. Nonetheless, we see limited downside as the stock has taken a beating with forward valuations near its eight-year trough price-earnings ratio of 10.4 times. We maintain our 'market perform' call on TNB with a revised fair value of RM6.10 (against RM6.50 previously) based on an unchanged target CY12 PER of 12 times. ' RHB Research, Aug 22
This article appeared in The Edge Financial Daily, August 23, 2011.
Company Name: TENAGA NASIONAL BHD
| Research House: RHB | Price Call: HOLD | Target Price: 6.10 |
Tenaga Nasional Bhd
(Aug 22, RM5.49)
Maintain market perform at RM5.55 with revised fair value of RM6.10 (from RM6.50): The management has reiterated its 3% electricity demand growth guidance for FY11, which we think is somewhat optimistic. Year-to-date, September 2010 to July 2011, we estimate electricity demand growth of only 2.8%, due to weaker demand from industrial users on the back of headwinds in the global economy.
The management kept its FY11 average coal cost guidance of US$110 (RM327.80) per tonne. This is achievable as coal prices have stabilised, so we expect TNB's 4QFY11 to be similar, if not lower than 3QFY11 (US$109 per tonne).
Continued gas supply disruptions in 4QFY11 may lead to elevated generation costs (possibly close to those seen in 3QFY11) as TNB is forced to continue burning more expensive oil and distillate fuels (six times costlier than subsidised gas). The power company received on average only 900 mmscfd of gas in June and July, though the situation has improved to 1,000 mmscfd in August. This is still far short of TNB's usual gas supply of 1,250 mmscfd.
According to management, its oil plants have been running at full capacity in 4QFY11. However, distillate consumption in August has been reduced, in tandem with the marginal improvement in gas supply, but we do not rule out the possibility of more disruptions ahead.
The gas supply bypass for Petroliam Nasional Bhd's Bekok C field has been delayed from August to September, which will'' erode TNB's FY12 earnings. The management had said the expected completion has seen several delays, so the latest does not come as a surprise. The delay, however, clouds TNB's FY12 earnings visibility notwithstanding the full-year benefit of the 2% base tariff hike. We estimate every one month delay could erode FY12 earnings by RM250 million or 10%.
Risks include: (i) slower than expected demand growth; (ii) depreciating ringgit; and (iii) rise in coal prices.
Taking into account higher generation costs in 4QFY11, we have cut our FY11 earnings forecasts by 38%. We have also trimmed FY12 earnings by 9% to take into account the one-month delay for the bypass.
We believe TNB's prospects remain clouded by further delays for the Bekok C bypass, which could weigh heavily on FY12 earnings, despite the full-year benefit of the 2% base tariff hike. While TNB's losses may strengthen its case for a tariff adjustment for coal costs, we believe chances are slim after receiving a tariff hike in June and potential political interference. Nonetheless, we see limited downside as the stock has taken a beating with forward valuations near its eight-year trough price-earnings ratio of 10.4 times. We maintain our 'market perform' call on TNB with a revised fair value of RM6.10 (against RM6.50 previously) based on an unchanged target CY12 PER of 12 times. ' RHB Research, Aug 22
This article appeared in The Edge Financial Daily, August 23, 2011.
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