Tenaga Nasional (TENA.KL): Key Takeaways from Citi Asian Utility Tour

PPA renegotiations to take time - The government (via the Economic Planning Unit and Energy Commission) is expected to lead the renegotiation of power purchase agreement (PPA). Management, however, could not offer a timeline when the PPA renegotiation would be resolved but agreed it would take time.

§ Pushing for tariff formula - Meanwhile, Tenaga has submitted its proposal to the government on the adoption of a tariff formula, which encompassed a fuel pass-through mechanism and a base tariff review. Under the proposal, Tenaga suggested that the tariff be reset every 3 months. Tenaga expects the outcome of its proposal to be out by the end of this year or early next year. Generally, management hopes to achieve a ROA of approximately 6% compared with 4.2% recorded in FY08.

§ No major review expected in July - Following a review in March, management would not be surprise if the tariff review in July is skipped or deferred to December.

§ Coal price to average US$85 in FY09E - Coal costs continue to decline. Based on current commitments, average coal costs should reach US$85 a tonne in FY08E, as guided.

§ Unlikely to buy into coal mines but is considering power ventures - Tenaga is unlikely to buy into coal mines but opportunities present themselves; the group prefers to look at greenfield power generation projects in the Middle-East, India and Vietnam.

An informal tariff mechanism in place - BUY

Tenaga Nasional: An informal tariff mechanism in place - BUY -
Mak Hoy Kit

Tenaga Nasional (TNB MK) - BUY
Price 5.95, TP 8.75, Mkt cap $7,127m, Avg t/o $12.7m

An informal tariff mechanism in place

* Management is upbeat on the recent tariff review, akin to an informal cost-pass-through mechanism.

* Main concern is lower electricity demand growth, but we note historical annual growth rates have never been negative.

* Maintain BUY on this deep-value stock. TP of MYR8.75 (WACC of 9.7%). FY09E P/E of 10.4x below 10-year lows.

2009E: Rec EPS 0.57, P/E 10.4, P/B 0.9, ROE 9.4, Yld 3.0
2010E: Rec EPS 0.63, P/E 9.5, P/B 0.9, ROE 9.6, Yld 3.5
2011E: Rec EPS 0.68, P/E 8.8, P/B 0.8, ROE 9.6, Yld 4.0

Mak Hoy Kit
BNP Paribas Capital (Malaysia) Sdn. Bhd.

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)

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.







KENANGA INVESTMENT BANK BERHAD (15678-H)

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