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

Tenaga Nasional Bhd
(Dec 13, RM8.66)
Maintain buy at RM8.60 with target price of RM9.98: The latest deferment in tariff hike is the third over the past year. Also, it fails to comply with the earlier government's commitment for a biannual review. Despite the inconclusiveness as to when the adjustment will take place now, we believe the recent announcement on potential possible adjustment as positive. The last tariff adjustment was in March 2009 when the electricity tariff structure in Peninsular Malaysia was reduced by 3.7% to 31.3 sen/kWh following a 25% cut in gas prices to RM10.70 respectively.

In tandem with a moderate economic outlook in CY11, with real GDP to expand by 5.3% from 7.2% in CY10, Tenaga expects electricity demand will grow by 5% in FY11 which is slightly higher than our forecast of 4.5%. Upside potential for electricity demand to grow remains. Much will depend on projects rolling out under Budget 2011 and the Economic Transformation Programme (ETP). We found for every 1% change in power demand growth, it affects Tenaga's core net profit by 2%-3%.

Tenaga's average coal cost in FY10 was US$88.20 (RM276.07) per metric ton (MT), slightly lower than FY09 by 2.2% to US$90.20/MT. For FY11, we expect coal cost to average at US$100/MT, which is in line with Tenaga's projection of US$100 to US$102 per MT. Room for average coal prices to be above the current level is brewing as the average coal price of Newcastle is at US$97.20/MT for the first eleven months of CY10. Should average coal cost be above both our and Tenaga's estimation, we found Tenaga's core net profit will drop by 15% for every US$10/MT increase in coal cost, assuming no changes to other factors (ceteris paribus).

We have maintained our forecasts for FY11 and FY12 on the assumption that: (1) there is no tariff hike; (2) average coal cost is at US$100/MT; and (3) gas price stays at RM10.70/mmBTU which translates into an average electricity tariff of 31.3 sen/kWh. On that premise, our fair value is at RM9.98. But should we assume Tenaga were to adjust its tariff upwards by 4% and holding all other factors constant, it will raise its core net profit by 35.2% to RM3.4 billion. This would translate to a fair value of RM11.50 which is a 15% premium to our current fair value of RM9.98 based on discounted cash flow with WACC of 10.9% and Terminal Growth of 3%. Our sensitivity analysis showed for every 1% change in tariff, it will affect Tenaga's core net profit by 7.8%. ' MIDF Research, Dec 13


This article appeared in The Edge Financial Daily, December 14, 2010.