KENANGA Tenaga - BUY - 15 Apr 2008

Tenaga Nasional – Earnings erosion apparent (Results Note)



Price: RM7.00

Target Price: RM8.35

Recommendation: BUY



· 1H08 recurring net profit (RNP) of RM1.57b was above our FY08E expectations of RM3.04b but within street forecast of RM3.46b, accounting for 56% and 45%, respectively. Tenaga National Bhd (TNB)’s revenue of RM12.3b for 1H08 came in line with our expectations (49% of our FY08E revenue of RM25.06b). This was due to 1H08 unit electricity demand growth of 6.6% YoY (6.0% for 1H07), which was driven by industrial and commercial sector YoY growth of 7% and 8.9% respectively.

· 1H08 net profit of RM2.58b eroded 8% YoY on the back of higher operating expenses which grew 16% YoY to RM8.20b. Higher coal cost of USD53.9/mT compared to the previous USD49/mT in 1H07 is the main culprit. TNB’s 44% increase in hydroelectricity production compensated the overall increase in fuel cost resulting in a lower 4.3% increase YoY to RM1.64b in 1H08. The increase in hydroelectric generation was necessary as gas supply was curtailed.

· 26% QoQ fall in 2Q08 pretax profit to RM1.22b due to higher IPP capacity payments which increased by 5% to RM2.3b as all 3 Tanjung Bin IPP coal power plants (TJB) were operational. Higher effective tax rates of 12% versus 8% in 1Q08 and softer 2Q08 electricity consumption further compounded the 30% fall in net profit. Typically, the rainy months of December and January coupled with festive seasons dampens electricity demand from residential and industrial customers respectively.

· Interim GDPS of 10sen, which accounts for 58% of our FY08E GDPS of 17.3sen. Management expects to declare lower FY08E dividends, compared to FY07, due to its heavier CAPEX and looming coal prices. To date, 1H08 CAPEX came within expectations, accounting for 52% of our FY08E estimates of RM4b.

· Maintaining FY08E recurring net profit forecast of RM3.04b. We believe our forecast is conservative as it already accounts for higher coal prices, especially when TNB commences bearing TJB’s coal cost differential (market price of USD82.5/mT versus TJB agreed price of USD28/mT) from 2H08 onwards.

· Target price remains at RM8.35, based on our DCF valuations using a 9.2% WACC and a 4.8% long-term growth; a 19% premium to its trading price. FY07E and FY08E PER remains attractive at 9x and 11x, respectively. Maintain BUY.





KENANGA INVESTMENT BANK BERHAD (15678-H)