Stock Name: TENAGA
Company Name: TENAGA NASIONAL BHD
Research House: MIDF

Tenaga Nasional Bhd
(Oct 26, RM8.88)
Maintain buy at RM8.80 with target price RM10.35: In the previous earnings announcement, the group posted a strong top line growth due to a 9.9% year-on-year growth in demand. However, despite the better than expected numbers, we retain our forecast as earnings in 4Q10 could be under pressure from the increasing coal prices and higher utilisation of coal for power generation.

A limited gas supply resulted in higher coal usage. The situation was exacerbated by the higher coal prices against FY09. The cost of coal has risen since Dec 2009, pushing Tenaga's average coal price to US$92 per tonne (current: about US$100) as compared with US$82 per tonne in 1H10. Expectations for the average coal price have increased to US$95 for FY10. As such, gross margins suffered, declining to 23.3% in 3Q10 from 32.1% in 2Q10.

In 3QFY10 Tenaga's forex exposure was at an average of RM3.26/US dollar (FY09: RM3.53), while ringgit/Japanese yen was averaging RM3.56 (FY09: RM3.75/Y100). The current RM/US dollar is at circa RM3.10, while the yen is around RM3.83/Y100. Despite the rise in the yen, the average for FY10 is hardly affected, thus the overall impact is expected to be marginal. As at 3Q10, gearing was at 43.2% against 46.5% in FY09, where almost 24% of its RM21.6 billion debt is in yen (22.2% in US dollars).

No tariff review will happen this year and any developments would be after the next general election. The government would not want to introduce unpopular measures at this point in time so it would be a lengthy wait for any firm decision on the matter.

We maintain 'buy' with target price unchanged at RM10.35. We are maintaining our FY10 numbers for the time being but, as mentioned, we are wary about the impact of the rising cost of coal with potential margin compression in 4Q10. Target price is pegged at 13 times FY11 earnings. ' MIDF Research (Oct 26)


This article appeared in The Edge Financial Daily, October 27, 2010.