Tenaga Nasional Bhd (Oct 31, RM 5.98)
Maintain neutral with revised target price of RM6.47 from RM6: The worst is over for TNB as a higher gas allocation in FY12 will boost its earnings. But this is offset by the lack of a complete fuel cost pass-through mechanism, which means that the power utility firm has to absorb coal costs above US$85 (RM262)/tonne and is susceptible to gas supply shocks.
FYAugust/11 core net profit was 5% below our forecast and 10% above consensus. As expected, there was no final dividend. We finetune FY12-13 earnings per share (EPS) and introduce FY14 numbers. We raise our target price (1.1 times price per book value (P/BV) after rolling it over to end-2012. Still a “neutral”.
FY11 revenue rose 6.2% due to a 3.1% year-on-year (y-o-y) increase in electricity sales in Peninsular Malaysia, a 2% net tariff hike on June 1, and a 15% tariff increase in Sabah on July 15. But core net profit (ex-FX losses) plunged 72.7% to RM693.6 million as operating costs excluding depreciation surged 21.7% to RM27 billion. This resulted from higher coal cost (+21.2% y-o-y) in price to US$106.9/mt; +6.2% y-o-y in consumption to 18.9 million mt and oil cost to compensate for the shortage of gas. The shortage resulted in an FY11 fuel mix of 45% gas, 44% coal, 6% hydro and 5% oil instead of the optimal 58% gas, 33% coal and 9% hydro. Hence earnings before interest, taxes, depreciation and amortisation (Ebitda) plunged 36.1% y-o-y to RM5.2 billion.
4Q core net loss came in at RM158 million, not as bad as our and consensus expectations. This was due to accrued revenue of RM292 million for the quarter. We believe the market was expecting a 4Q net loss of RM400 million to RM500 million as the management had indicated that the 4Q could exceed 3Q’s net loss of RM440 million.
We believe that earnings will rebound in FY12 as TNB’s gas allocation will improve, resulting in lower oil and distillate use. We estimate a tripling of FY12 net profit. TNB indicated that it expects to receive an average natural gas allocation of 1,100-1,150 million metric standard cubic feet per day (mmscfd) (2H11 average: 950 mmmscfd) in FY12 because of additional gas from the Bekok-C natural gas field and less maintenance work by Petroliam Nasional Bhd (Petronas).
During the results conference call with CEO Datuk Seri Che Khalib Mohamad Noh and CFO Mohamed Rafique, TNB said the government has accepted a proposal to raise the coal pass-through price from US$85/tonne to US$105-US$110/tonne. The company indicated that it will raise overall electricity tariffs by 4% and the company’s annual revenue by RM1.4 billion.
However, it is unclear when this will be implemented. Instead of changing tariffs on an ad hoc basis, we believe that a complete cost pass-through mechanism for all fuels is necessary to reduce earnings volatility and enhance TNB’s appeal to the market. Currently, only the cost of gas is completely passed through to consumers.
TNB is currently procuring its coal requirements for FY12. It has been able to buy bituminous coal from South Africa at a discount of up to US$1/tonne to index prices due to the expectations of a milder winter. The management is expecting a coal price of US$110/tonne in FY12 in line with our regional coal price forecast.
We gather that the construction of Petronas Gas Bhd’s (PetGas) regasification terminal (RGT) in Malacca is on track. The undersea piling works are complete. The contractor (Muhibbah Engineering Bhd) is constructing the jetty at the shipyard and will soon transfer it to the offshore site.
Overall, the project is 50% complete. Outstanding works include the laying of a gas pipeline (3km offshore and 30km on land) from the terminal to PetGas’ pipeline network. The completion of the RGT will help Petronas meet its commitment to supply 1,350 mmscfd of natural gas to the power sector from FY12 onwards.
TNB indicated that a proposal has been submitted to the government for Petronas to compensate TNB for the additional cost of generating electricity arising from the shortage of gas (below 1,250 mmscfd or RM2.1 billion for FY11). The company said it has not asked the independent power producers (IPP) to chip in and that only Petronas is being asked to compensate TNB.
Despite TNB’s comments, we gather that some IPPs are working on a proposal to compensate TNB for the gas shortage. We understand that the compensation may not be a direct payment to TNB and we believe it could tie in with the extension of the first-generation IPPs’ power purchase agreements (PPA) that begin expiring in 2015.
Note that TNB favours the expiry of the first-generation IPPs’ PPAs and the construction of new power plants. However, if attractive terms can be negotiated for an extension instead of new builds, TNB may have to take the pragmatic but less glamorous approach and implement the more economical option. — CIMB IB Research, Oct 31
This article appeared in The Edge Financial Daily, November 1, 2011.
Maintain neutral with revised target price of RM6.47 from RM6: The worst is over for TNB as a higher gas allocation in FY12 will boost its earnings. But this is offset by the lack of a complete fuel cost pass-through mechanism, which means that the power utility firm has to absorb coal costs above US$85 (RM262)/tonne and is susceptible to gas supply shocks.
FYAugust/11 core net profit was 5% below our forecast and 10% above consensus. As expected, there was no final dividend. We finetune FY12-13 earnings per share (EPS) and introduce FY14 numbers. We raise our target price (1.1 times price per book value (P/BV) after rolling it over to end-2012. Still a “neutral”.
FY11 revenue rose 6.2% due to a 3.1% year-on-year (y-o-y) increase in electricity sales in Peninsular Malaysia, a 2% net tariff hike on June 1, and a 15% tariff increase in Sabah on July 15. But core net profit (ex-FX losses) plunged 72.7% to RM693.6 million as operating costs excluding depreciation surged 21.7% to RM27 billion. This resulted from higher coal cost (+21.2% y-o-y) in price to US$106.9/mt; +6.2% y-o-y in consumption to 18.9 million mt and oil cost to compensate for the shortage of gas. The shortage resulted in an FY11 fuel mix of 45% gas, 44% coal, 6% hydro and 5% oil instead of the optimal 58% gas, 33% coal and 9% hydro. Hence earnings before interest, taxes, depreciation and amortisation (Ebitda) plunged 36.1% y-o-y to RM5.2 billion.
4Q core net loss came in at RM158 million, not as bad as our and consensus expectations. This was due to accrued revenue of RM292 million for the quarter. We believe the market was expecting a 4Q net loss of RM400 million to RM500 million as the management had indicated that the 4Q could exceed 3Q’s net loss of RM440 million.
We believe that earnings will rebound in FY12 as TNB’s gas allocation will improve, resulting in lower oil and distillate use. We estimate a tripling of FY12 net profit. TNB indicated that it expects to receive an average natural gas allocation of 1,100-1,150 million metric standard cubic feet per day (mmscfd) (2H11 average: 950 mmmscfd) in FY12 because of additional gas from the Bekok-C natural gas field and less maintenance work by Petroliam Nasional Bhd (Petronas).
During the results conference call with CEO Datuk Seri Che Khalib Mohamad Noh and CFO Mohamed Rafique, TNB said the government has accepted a proposal to raise the coal pass-through price from US$85/tonne to US$105-US$110/tonne. The company indicated that it will raise overall electricity tariffs by 4% and the company’s annual revenue by RM1.4 billion.
However, it is unclear when this will be implemented. Instead of changing tariffs on an ad hoc basis, we believe that a complete cost pass-through mechanism for all fuels is necessary to reduce earnings volatility and enhance TNB’s appeal to the market. Currently, only the cost of gas is completely passed through to consumers.
TNB is currently procuring its coal requirements for FY12. It has been able to buy bituminous coal from South Africa at a discount of up to US$1/tonne to index prices due to the expectations of a milder winter. The management is expecting a coal price of US$110/tonne in FY12 in line with our regional coal price forecast.
We gather that the construction of Petronas Gas Bhd’s (PetGas) regasification terminal (RGT) in Malacca is on track. The undersea piling works are complete. The contractor (Muhibbah Engineering Bhd) is constructing the jetty at the shipyard and will soon transfer it to the offshore site.
Overall, the project is 50% complete. Outstanding works include the laying of a gas pipeline (3km offshore and 30km on land) from the terminal to PetGas’ pipeline network. The completion of the RGT will help Petronas meet its commitment to supply 1,350 mmscfd of natural gas to the power sector from FY12 onwards.
TNB indicated that a proposal has been submitted to the government for Petronas to compensate TNB for the additional cost of generating electricity arising from the shortage of gas (below 1,250 mmscfd or RM2.1 billion for FY11). The company said it has not asked the independent power producers (IPP) to chip in and that only Petronas is being asked to compensate TNB.
Despite TNB’s comments, we gather that some IPPs are working on a proposal to compensate TNB for the gas shortage. We understand that the compensation may not be a direct payment to TNB and we believe it could tie in with the extension of the first-generation IPPs’ power purchase agreements (PPA) that begin expiring in 2015.
Note that TNB favours the expiry of the first-generation IPPs’ PPAs and the construction of new power plants. However, if attractive terms can be negotiated for an extension instead of new builds, TNB may have to take the pragmatic but less glamorous approach and implement the more economical option. — CIMB IB Research, Oct 31
This article appeared in The Edge Financial Daily, November 1, 2011.
