Tenaga Nasional Berhad maintain as a big chill with TP RM 7.80 (+20%)

Tenaga Nasional Berhad (5347) maintain as a big chill with TP RM 7.80 (+20%)

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3Q11 Results Preview – Likely A Disappointing One

We reiterate our view that Tenaga will report disappointing 3Q11 earnings,

scheduled for release on Thursday, July 21. We believe the group would

report a core net loss, owing largely to sharp increase in fuel cost. We have

highlighted in our report dated June 27 that fuel cost increased significantly

in 3Q11 largely due to gas supply curtailment, which averaged only 1,000

mmscfd, 20% below the 1,250 mmscfd allocated to the power sector.

Consequently, the group had to utilise more coal and fuel oil to generate

electricity, which would have impacted margin negatively as both fuel oil

and coal are sourced at market price. We estimated in our previous report

that the cost to generate electricity using fuel oil is 53.5 sen/kWh vs.

average tariff rate of 33.5 sen/kWh (31.1 sen/kWh pre‐June 1 tariff hike),

i.e. Tenaga will be selling this electricity at a loss.

Electricity Demand Moderating Too

Electricity demand grew by 2.9% in 8MFY11, indicating that growth is

already moderating after a strong growth in FY10 (+8.8% YoY). In this

perspective, our FY11 estimate of a 4.4% growth appears to be on the

optimistic side. We shall review the figure after the 3Q11 results

announcement. On the flip side though, we think lower demand could turn

out to be a blessing in disguise as the group would incur less fuel cost,

which is a key component of operating cost (41% in 1H11). There is net

earnings accretion as the lower revenue will be offset by expanded margin

as seen in 2QFY09 results.

Gas Supply To Expand Ahead

We also believe that, barring a sudden spike in coal price, downside risk

from fuel cost (per unit basis) would peak in 3Q/4Q11. The recommissioning

of the Bekok gas platform, which was damaged by fire in

Dec 2010, in end July would add about 100 mmscfd to daily supply (total

1,100 mmscfd). We understand that Petronas is in the midst of recommissioning

production at the Bekok field using jackup rigs, although

full repair work could take up to one year to complete (Dec 2011).

Maintain Tenaga As Buy

Maintain Tenaga as Buy with RM7.80 target price based on 15x target PER.

We continue to view the stock as attractive in a risk‐reward point of view.

Downside risk is limited by compelling valuations (forward PE imputes

19% discount to long term average). On the other hand, if the government

delivers on the cost pass through mechanism, or successfully conclude

PPAs review that’s value accretive to Tenaga, the share price could re‐rate.

Key risk factors to our earnings forecasts/recommendation are, 1) coal

price exceeding our expectations, 2) government backtracks on the

implementation of FCPT, and 3) electricity demand 

exceeding/underperforming our expectations.

Source: TA