KENANGA: Tenaga - BUY - 26 Mar 2008

Tenaga Nasional – One less uncertainty (Company Update)



Price: RM7.35

Target Price: RM8.46

Recommendation: BUY



· Gas prices to remain unchanged for the moment, according to the Prime Minister and the Second Finance Minister at yesterday’s “Invest Malaysia 2008” conference. The government has reassuringly stated that if gas subsidies are reduced/removed, they will not “squeeze” Tenaga National (TNB).

· Good news… We believe this is positive because TNB will be momentarily sparred as any gas subsidy revisions. As reduction/removal in gas subsidies, without a concurrent tariff revision, will be extremely detrimental to its bottomline. Recall that 1) gas constitutes 68% of fuel required for TNB’s industry generation 2) every RM1 increase in TNB’s gas subsidized price of RM6.40/mmBtu implies that EPS falls by 6% to 8%.

· “Fuel-pass-through-mechanism” (FPTM) not likely to see light this year. TNB’s CFO also stated today that TNB hopes to implement the FPTM within 12 months. However, as gas subsidies remain unchanged while uncertainty looms in the political arena, we believe that the government may not be in a hurry to resolve the FPTM. Nevertheless, we expect the government to deliver meet its commitment to TNB to revise its base tariff in mid 2009. Base tariff revisions are needed to address general inflationary effects on their overheads.

· …but not the best news. However, the absence of the FPTM means that TNB will still face the issue of rising coal prices. Coal makes up 26% of fuel requirements for TNB’s industry generation, which is equivalent to some 13 mTonnes of coal. Although coal is less than half of gas requirements, one must remember that TNB has to bear the difference of coal prices between market (USD78/mT at 25/03/08) and PPA agreed prices (USD29/mT). Our analysis reveals that every USD1/mT increase in coal prices for TNB implies a 3.2% decline in EPS.

· The FPTM is needed in a long run, but for the meantime, the next best government move for TNB is reviewing the PPA terms, which are extremely favourable to the IPPs and not to TNB or the people. However, any PPA renegotiation will be much later on as we wait for the political “dust” to settle.

· No revision in FY08E forecast of RM3.3b pending further information about FY08E average coal prices. It was reported that TNB managed to secure 111% of its FY08 coal requirements or c.150 mT coal. However, they have not secured coal procurement contracts for FY09 and FY10, which is normal as most contracts have a 6 month horizon. We have assumed USD67.7/mT average coal prices for FY08E.

· Maintain target price of RM8.46. FY08E and FY09E PER are attractive at of 10x and 11x, respectively. BUY







KENANGA INVESTMENT BANK BERHAD (15678-H)

Research Department