Investor reaction to Tenaga Nasional Bhd’s (TNB) earnings results for 1QFY12 ended November 2011, released earlier this week, was relatively lukewarm despite improvement in the company’s underlying utility business. Excluding non-cash foreign exchange (forex) translation losses totalling some RM419.1 million, due to the stronger US dollar and yen against the ringgit, TNB’s net profit for 1QFY12 was RM194.4 million, compared with a net loss totalling RM619 million in 2HFY11 (after adjusting for forex).
The outlook certainly appears to be brightening for the national utility company on several fronts, including a gradual recovery in gas supply, stabilised coal prices, strengthening of electricity demand and compensation from the government for the additional fuel bill incurred last year due to the shortage of gas.
Demand for electricity in the peninsula regained some traction in the last two quarters. After falling off the pace in 2Q and 3QFY11, growth came in at 2% in 2QFY11 and 1.5% in 3Q year-on-year in the two quarters, volume sales growth recovered in 4QFY11 and 1QFY12 at roughly 3.9% y-o-y. TNB forecasts demand will grow by about 4% to 5% in FY12.
Petroliam Nasional Bhd (Petronas), meanwhile, is finalising plans to buy an additional 70mmscfd gas from its joint development area with Thailand. The additional supply is expected to lift total supply to the power industry above 1,100mmscfd for the rest of the current financial year. Gas supply averaged 1,050mmscfd in 1QFY12 after dipping as low as 900mmscfd in 4QFY11.
Come September, when the regassification plant in Malacca is slated to come onstream, gas available to the power sector should be further boosted to 1,350mmscfd, as per the original agreement.
For instance, the additional gas supply will be purchased at market price, above the subsidised price of RM13.70 per mmbtu, on which the current tariff is based. It is unclear at this point whether TNB will be allowed to pass on the higher gas price to consumers. The government has also been silent on the RM3 per mmbtu hike planned every six months until gas prices are at par with market prices under the broader subsidy rationalisation programme.
Even though the existing tariff framework allows for a review and cost pass-through every six months, any tariff adjustment still requires government approval, which is dependent on a host of external factors such as economic growth, inflation and the prevailing political climate.
Since the last hike in June 2011, there has been no further indication of any tariff adjustment. Few market observers believe there will be one, at least not before the general election.
Previously, TNB had hinted that it would try to incorporate a higher coal price into the current tariff in a December 2011 review. The company forecast coal prices to average roughly US$110 (RM341) per tonne in FY12, higher than the benchmark of US$85 per tonne in the current tariff calculation.
Last but not least, although the government has agreed to shoulder two-thirds of the additional distillate and oil cost up to October 2011, it is unclear if the same applies to the additional costs since then. TNB is still burning distillate and oil, but at a slightly reduced volume than in 3Q and 4QFY11. The company estimates the additional fuel cost in 1QFY12 was around RM700 million or so.
These structural issues are unlikely to be resolved in the foreseeable future. Such uncertainty will probably keep investors wary of TNB’s longer-term earnings risks.
The gradual increase in gas supply is positive for TNB, in that it can reduce consumption of pricey distillate and fuel oil. Furthermore, its gas plants are not meant to run on distillate and long-term usage could compromise the equipment as well as the overall system stability.
Thus, in the absence of further forex losses, the company looks set to return to profitability for the rest of the current financial year. TNB expects to recognise income totalling RM2 billion, half of which is already in the bank, from the government and Petronas in 2QFY12. The amount is about two-thirds of its additional fuel bill for the period to October 2011.
The compensation will provide a sharp boost to TNB’s earnings in FY12 and could lift interest in the shares, whose price has fallen well off last year’s high of RM7.21. As such, we do not discount the stock’s prospects for gains over the next few quarters.
Having said that, investing in TNB over the longer term, as a core portfolio holding, for instance, is still a somewhat risky proposition under the existing industry framework. The structural problems of fuel subsidy and automatic cost pass-through mechanism for the electricity tariff in the country remain unresolved.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, January 20, 2012.
The outlook certainly appears to be brightening for the national utility company on several fronts, including a gradual recovery in gas supply, stabilised coal prices, strengthening of electricity demand and compensation from the government for the additional fuel bill incurred last year due to the shortage of gas.
Demand for electricity in the peninsula regained some traction in the last two quarters. After falling off the pace in 2Q and 3QFY11, growth came in at 2% in 2QFY11 and 1.5% in 3Q year-on-year in the two quarters, volume sales growth recovered in 4QFY11 and 1QFY12 at roughly 3.9% y-o-y. TNB forecasts demand will grow by about 4% to 5% in FY12.
Petroliam Nasional Bhd (Petronas), meanwhile, is finalising plans to buy an additional 70mmscfd gas from its joint development area with Thailand. The additional supply is expected to lift total supply to the power industry above 1,100mmscfd for the rest of the current financial year. Gas supply averaged 1,050mmscfd in 1QFY12 after dipping as low as 900mmscfd in 4QFY11.
Come September, when the regassification plant in Malacca is slated to come onstream, gas available to the power sector should be further boosted to 1,350mmscfd, as per the original agreement.
For instance, the additional gas supply will be purchased at market price, above the subsidised price of RM13.70 per mmbtu, on which the current tariff is based. It is unclear at this point whether TNB will be allowed to pass on the higher gas price to consumers. The government has also been silent on the RM3 per mmbtu hike planned every six months until gas prices are at par with market prices under the broader subsidy rationalisation programme.
Even though the existing tariff framework allows for a review and cost pass-through every six months, any tariff adjustment still requires government approval, which is dependent on a host of external factors such as economic growth, inflation and the prevailing political climate.
Since the last hike in June 2011, there has been no further indication of any tariff adjustment. Few market observers believe there will be one, at least not before the general election.
Previously, TNB had hinted that it would try to incorporate a higher coal price into the current tariff in a December 2011 review. The company forecast coal prices to average roughly US$110 (RM341) per tonne in FY12, higher than the benchmark of US$85 per tonne in the current tariff calculation.
Last but not least, although the government has agreed to shoulder two-thirds of the additional distillate and oil cost up to October 2011, it is unclear if the same applies to the additional costs since then. TNB is still burning distillate and oil, but at a slightly reduced volume than in 3Q and 4QFY11. The company estimates the additional fuel cost in 1QFY12 was around RM700 million or so.
These structural issues are unlikely to be resolved in the foreseeable future. Such uncertainty will probably keep investors wary of TNB’s longer-term earnings risks.
The gradual increase in gas supply is positive for TNB, in that it can reduce consumption of pricey distillate and fuel oil. Furthermore, its gas plants are not meant to run on distillate and long-term usage could compromise the equipment as well as the overall system stability.
Thus, in the absence of further forex losses, the company looks set to return to profitability for the rest of the current financial year. TNB expects to recognise income totalling RM2 billion, half of which is already in the bank, from the government and Petronas in 2QFY12. The amount is about two-thirds of its additional fuel bill for the period to October 2011.
The compensation will provide a sharp boost to TNB’s earnings in FY12 and could lift interest in the shares, whose price has fallen well off last year’s high of RM7.21. As such, we do not discount the stock’s prospects for gains over the next few quarters.
Having said that, investing in TNB over the longer term, as a core portfolio holding, for instance, is still a somewhat risky proposition under the existing industry framework. The structural problems of fuel subsidy and automatic cost pass-through mechanism for the electricity tariff in the country remain unresolved.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, January 20, 2012.
