Tenaga Nasional Berhad or "TENAGA" 9M2010 net income is better-than-expected at RM2808.3m, representing 86.3% of our forecast and 91.8% of consensus forecast. However, RM681.1m of that was explained by forex gain which we do not expect to repeat in 4Q2010 due to minimal appreciation seen in Ringgit. Electricity demand continue to grow 9.9% in Peninsula Malaysia. Meanwhile, higher coal price has caused EBITDA margin to drop in 3Q2010. Maintain BUY but with lower target price of RM9.78 (previously: RM10.30).

Highlights

• Better than expected result ? TENAGA registered 9M2010 net income of RM2808.3m, representing 86.3% of our forecast and 91.8% of consensus forecast. The better than expected result was mainly attributed to: i) forex gain and ii) stronger demand growth.
• But 3Q2010 EBITDA margin drop to 23.3% ? However, TENAGA's 3Q2010 EBITDA margin drop to 23.3% as compared to 2Q2010 figure of 32.1%. This was attributed to the higher cost of generation from coal to meet rising electricity demand.
• Revenue grow 4.5% but operating expense up 12.3% ? TENAGA registered revenue of RM7723.3m (up 4.5% q-o-q and 10.3% y-o-y) in 2Q2010. The revenue growth was due to higher sale of electricity in Peninsular Malaysia which has grown 9.9%. However, operating expense jumped 12.3% q-o-q to RM6166.5m due to higher cost from coal generation.
• Maintain FY2010 earnings forecast of 75.12 sen per share ? Despite the set of stronger than expected result in 3Q2010, we noticed that RM573.2m of 3Q2010 net profit was explained by forex gain. Thus, we believe that 4Q2010 should be weaker due to the expected minimal gain from further Ringgit appreciation. By taking this into consideration, we have maintained our forecast for FY2010.
• Maintain BUY with target price of RM9.78 - Using DCF model (FCFF) with WACC 7.6%, we value Tenaga at RM9.78 after applying a 5% discount to our FCFF value of RM10.30. We have included our discount to reflect the risk of higher coal price and possible decline in electricity demand due to slowdown in economy caused by austerity measure from Europe. Nevertheless, TENAGA remained a BUY due to: i) possibility of tariff reform to fuel-pass-through mechanism later this year and ii) limited downside as it is trading at P/NTA of 1.32x.
• Risk ? The risk to our recommendation is that Tenaga price might face pressure if coal price repeat the increase trend in 2008, where at one point it was at more than US$180/ton.

Extracted from: JF Apex Securities Newsletter (Results Update) 15 July 2010