Tenaga Nasional Bhd (Jan 16, RM6.12)
Maintain buy with unchanged target price RM6.70: Tenaga Nasional Bhd (TNB) is due to release its 1QFY12 results on Jan 17. We estimate 1QFY12 will see a further net loss of RM300 million to RM380 million, much lower than 4QFY11’s RM453.9 million net loss.
The estimated net loss is due to the continued high fuel cost, coupled with foreign exchange losses (estimated at RM395 million, up by 276.2% year-on-year [y-o-y] and 18% quarter-on-quarter [q-o-q]) given the strengthening of the yen and US dollar against the ringgit.
The unavailability of adequate gas supplies has led TNB to continue burning more costly alternative fuel (oil and distillate) apart from coal.
The recent one-off advance payment worth RM1 billion from the government should help alleviate pressure on TNB’s fuel expenses.
We gather the national utility is still getting slightly less than 1,000 million metric standard cubic feet per day (mmscfd) gas supply in 1QFY12 (below the required gas supply level of 1,250mmscfd).
However, we have anticipated this shortfall as we only expect gas supply level of 1,050 mmscfd for 1H12.
The remaining RM1.1 billion, which TNB expects to receive in FY12, is still being verified by Petroliam Nasional Bhd. Recall that in December 2011, the government approved a fuel cost sharing mechanism to address the current increased cost borne by TNB due to the gas supply shortage.
The fuel cost sharing mechanism will see the government, TNB and Petronas equally share the RM3.1 billion additional costs incurred from the purchase of alternative fuel from January 2010 until October 2011. TNB is entitled to RM2.1 billion compensation in total but we make no changes yet to our FY12F/FY13F earnings forecast.
Electricity demand grew by 7.2% y-o-y in the first two months of 1QFY12. The strong growth was attributed to the low base effect and Hari Raya Aidilfitri season. The major source of the strong demand is the commercial sector which made up 34.7% of TNB’s unit electricity sales in the first two months of 1QFY12.
However, TNB guided that it expects the electricity demand for 1QFY12 to register at least 4% growth.
Note that coal prices have been easing to below US$100 (RM315) per tonne, against our FY12F assumption of US$110 per tonne, against a backdrop of post-mild winter season and China’s lower purchasing activities.
Should the current downward trend in coal prices persist, TNB will enjoy substantial savings. Every US$10 per tonne change in average coal price translates to about a RM500 million change in TNB’s fuel costs.
We are leaving our earnings forecast unchanged pending the release of the 1QFY12 results. Our target price remains unchanged at RM6.70 based on discounted cash flow using a weighted average cost of capital of 8.8%. We reiterate our “buy” recommendation although the expected total return now is at 10.3% (which is below than our 15% “buy” definition).
We believe much of the negative news has been priced in and investors are looking forward to a better 2H12 given better gas supplies as the Malacca regasification plant is to take off in July 2012. Another key re-rating catalyst is the potential upward tariff review as per the fuel cost pass-through (FCPT) mechanism amid incorporation of coal prices in the FCPT review. — MIDF Research, Jan 16
This article appeared in The Edge Financial Daily, January 17, 2012.
Maintain buy with unchanged target price RM6.70: Tenaga Nasional Bhd (TNB) is due to release its 1QFY12 results on Jan 17. We estimate 1QFY12 will see a further net loss of RM300 million to RM380 million, much lower than 4QFY11’s RM453.9 million net loss.
The estimated net loss is due to the continued high fuel cost, coupled with foreign exchange losses (estimated at RM395 million, up by 276.2% year-on-year [y-o-y] and 18% quarter-on-quarter [q-o-q]) given the strengthening of the yen and US dollar against the ringgit.
The unavailability of adequate gas supplies has led TNB to continue burning more costly alternative fuel (oil and distillate) apart from coal.
The recent one-off advance payment worth RM1 billion from the government should help alleviate pressure on TNB’s fuel expenses.
We gather the national utility is still getting slightly less than 1,000 million metric standard cubic feet per day (mmscfd) gas supply in 1QFY12 (below the required gas supply level of 1,250mmscfd).
However, we have anticipated this shortfall as we only expect gas supply level of 1,050 mmscfd for 1H12.
The remaining RM1.1 billion, which TNB expects to receive in FY12, is still being verified by Petroliam Nasional Bhd. Recall that in December 2011, the government approved a fuel cost sharing mechanism to address the current increased cost borne by TNB due to the gas supply shortage.
The fuel cost sharing mechanism will see the government, TNB and Petronas equally share the RM3.1 billion additional costs incurred from the purchase of alternative fuel from January 2010 until October 2011. TNB is entitled to RM2.1 billion compensation in total but we make no changes yet to our FY12F/FY13F earnings forecast.
Electricity demand grew by 7.2% y-o-y in the first two months of 1QFY12. The strong growth was attributed to the low base effect and Hari Raya Aidilfitri season. The major source of the strong demand is the commercial sector which made up 34.7% of TNB’s unit electricity sales in the first two months of 1QFY12.
However, TNB guided that it expects the electricity demand for 1QFY12 to register at least 4% growth.
Note that coal prices have been easing to below US$100 (RM315) per tonne, against our FY12F assumption of US$110 per tonne, against a backdrop of post-mild winter season and China’s lower purchasing activities.
Should the current downward trend in coal prices persist, TNB will enjoy substantial savings. Every US$10 per tonne change in average coal price translates to about a RM500 million change in TNB’s fuel costs.
We are leaving our earnings forecast unchanged pending the release of the 1QFY12 results. Our target price remains unchanged at RM6.70 based on discounted cash flow using a weighted average cost of capital of 8.8%. We reiterate our “buy” recommendation although the expected total return now is at 10.3% (which is below than our 15% “buy” definition).
We believe much of the negative news has been priced in and investors are looking forward to a better 2H12 given better gas supplies as the Malacca regasification plant is to take off in July 2012. Another key re-rating catalyst is the potential upward tariff review as per the fuel cost pass-through (FCPT) mechanism amid incorporation of coal prices in the FCPT review. — MIDF Research, Jan 16
This article appeared in The Edge Financial Daily, January 17, 2012.
