Tenaga Nasional - OUTPERFORM

Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD

Research House: KENANGA

Price Call: BUY

Target Price: 7.31

We expectTenaga Nasional's (Tenaga) 2Q12 core earnings to surge 138% QoQ to RM438m onthe back of a better gas supply, lower coal cost, high hydro power usage andmanageable unit demand. Its 1H11 estimated core earnings of RM622m should bewithin our projection but could be below market (possibly due to distortions causedby one-offs). Tenaga has also gotten its full RM2.0b compensations in 2Q12.Coupled with RM550m in non-cash FOREX gains, 2Q12 reported net profit should beRM2.49b. There is no change to our FY12E core earnings of RM1.21b pending gassupply issue clarity from management. We continue to advise investors to take a6-9 month view on the stock as FY13E should see improved gas supply and thus,lower fuel cost. We are also banking on meaningful tariff revisions post GE,since neither Tenaga nor the government can continue to bear the heavy fuelsubsidy burdens. We reiterate OUTPERFORM recommendation and TP of RM7.31, basedon peak 19x Fwd PER* on its average FY12-13E core EPS.

We are expecting 2Q12 core earnings of RM438m (+138% QoQ), which is a significantimprovement from last quarter, because of much lower MFO/diesel usage due to 1)2Q12 gas supply was slightly above 1Q12's 1050mmscfd; 2) high hydro power usagedue to rainy season; 3) coal cost was lower QoQ and 4) 2Q12 unit demand to be lowerthan 1Q11 due to the festivities period and short Feb-2012. For FY12E, lowerdemand will result in higher earnings as shortage of gas supply will be met bythe more expensive MFO/diesel usage. However, 1H12 core earnings of RM622mwould still be a 51% decline YoY as 1H11 had a better gas supply and generationmix. Going forward, we expect Tenaga to see better gas supply of >1100mmscfdif PETRONAS can secure an additional 70mmscfd from the Thailand JDA. 

1H12 core earnings of RM622m should be within our estimate of FY12Ecore earnings of RM1.21b. However, it may come in below market expectations asthe street's FY12E  core earnings ofRM2.34b may be distorted by inclusion of the RM2.0b compensations in coreearnings.  We maintain our estimates fornow pending clarity on the 2H12 gas supply situation. 

Full RM2.0b compensations are in Tenaga's booksnow, which has beenimputed in our FY12E reported net profit as a one-off item; note that theRM2.0b is subject to corporate tax. Tenaga has gotten the final payment ofRM1.0b from PETRONAS in Feb-12. Inclusive of non-cash FOREX gains of RM550m in2Q12 (on the back of USD and JPY depreciating against the RM by 6% and 9% QoQ),we expect a  2Q12 reported net profit ofRM2.49b. 1H12 reported net profit will be lower at RM2.26b due to FOREX lossesin 1Q12. 

Coal cost trending downwards, but Tenaga will maintain FY12E estimateof USD110/mt. We estimate 2Q12 coal cost of USD107/mT vs. 1Q12's USD110/mT.Management is likely to maintain its and our FY12E assumed cost of USD110/mT.According to management, they do not expect potential Indonesia export tax oncoal to affect its FY12E guidance since coal prices have started trendingdownwards.

5M12 Peninsular unit demand registers growth of4.4%.  We continue to assume FY12E Peninsular unit demand of 4.0% as we expect demands tocool-off in 2H12. If unit demand points to higher levels, there will be furtherdownside to our FY12E core earnings of RM1.21b (+233% YoY), which we aremaintaining for the moment.  

Source: Kenanga