KENANGA: Tenaga Nasional - BUY - 3 Apr 2008

Tenaga Nasional – Goodbye Lahad Datu (Company Update)



Price: RM7.50

Target Price: RM8.35

Recommendation: BUY



· Lahad Datu coal power plant (LDCP) project is off. Yesterday, the Sabah Government announced that it has cancelled the RM1.3b coal power plant project in Silam, Lahad Datu (see recap below). The Sabah State’s Cabinet stated that its decision was driven by health and environmental reasons. They have also asked Tenaga National (TNB), and its 80% owned Sabah Electricity Board Sdn Bhd (SESB), to look for alternative energy sources.

· The good part… Scrapping this deal will not be detrimental to TNB in the immediate term, especially when reserve margins are around 45% versus worldwide trends of 20% to 25%. FY08E to FY11E CAPEX requirements should be marginally lower as TNB was expected to use 20% equity financing for its RM530m portion of the project or RM35m p.a. over 3 years.

· …and the bad part. Although reserve margins are high, the distribution of power plants is lopped sided towards the Peninsula. In fact, TNB was trying to source cheaper energy for East Malaysia (EM) as the Sabah power plants tend to be small inefficient fuel/diesel power plants; a critical factor when Sabah’s electricity demand is growing from the wealth generated from high CPO prices. As such, it missed out on an opportunity to enhance its profitability where there is a mismatch in supply and demand.

· TNB locked in FY08E average coal cost of USD75.4/mT which is 11.4% higher than our earlier coal price estimates of USD67.7/mT. We are revising downwards FY08E net profit by 6% to RM3.09b. We have maintained our CAPEX estimates of RM4b p.a. given the marginal effect of LDCP to its historical CAPEX of RM3b to RM5b p.a. We are maintaining our FY09E and FY10E coal assumptions at USD90.0/mT and USD94.5/mT, respectively.

· Tweaking fair value lower by 1% to RM8.35, based on our DCF valuations using 9.2% WACC and 4.8% long-term growth rate, to account for FY08E higher coal prices. FY08E and FY09E PER are attractive at of 11x each. BUY.







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