Results

Above Expectations - Reported 2Q13 core earnings of RM771.4m , bringing 1H13 earnings to RM1.42bn or 51.3% of HLIB’s FY13 forecasted core earnings of RM2.77bn.

Deviations

Lower than expected coal price and higher than expected gas supply.

Dividends

Announced interim net dividend of 10 sen.

Highlights

2Q13 power demand increased by 5.5% yoy, while revenue increased by 2.6% yoy due to lower deferred income and higher accrued revenue. Power demand increased by 4.4% yoy in 1H13, inline with our expectations.

Fuel cost has dropped drastically in 2Q13, due to the improvement of gas supply and coal generation, which has reduced the dependency of alternative fuels (distillates and oils) significantly to RM42.2m in the quarter.

However, we expect higher reliance on alternative fuels in the coming quarter due to seasonally higher power demand, while gas supply will be relatively stagnant and coal power plant has already reach high utilization rate.

TNB also benefits from the low coal price (<US$85/mt). Coal price is likely to stay below US$90/mt in 2H13.

The lower fuel cost in 2Q13 was offset by the higher staff cost (RM200m bonus payments and RM95m FRS adjustment) and RM100m asset impairments in the quarter.

Continued JP¥ depreciation has benefited TNB substantially due to its large exposure to JP¥ loan worth RM4.3bn (out of total RM21.7bn). Reported forex gain of RM391.2m in 2Q13.

Management reiterated its stance that the higher priced LNG supply from the Melaka regassification plant will not affect Tenaga’s bottomline. A stabilization fund (self funding mechanism) will be established to smoothen the transition into higher electricity tariff going forward.

Risks

Downside risks: 1) Disruption in gas supply; 2) Delay in tariff revision; and 3) Indonesia implement tax on coal export.

Forecasts

We have lowered our coal price assumptions to US$85/mt (from US$90/mt) for FY13 and US$95/mt (from US$100/mt) for FY14-15, and thus FY13 earnings increased by 9.2% and FY14-15 earnings by 6.2-6.6%.

Rating

BUY

• Positives –
  • Lower coal price at ~US$85/mt.
  • Implementation of automatic FCPT mechanism which eliminates uncertainties about future earnings.
  • Earnings neutral from the higher LNG charges.
• Negatives –
  • High commitment on IPPs payments.
  • Utilization of coal-fired power plants have reach limit.
  • Decision on tariff revisions depends on the government.

Valuation

• We remained positive on TNB on power sector restructuring, lower coal price and new power plant with higher efficiency. BUY on Tenaga with higher TP: RM9.05 (from RM8.25) based on DCFE post earnings upward revisions.

Source: Hong Leong Investment Bank Research - 19 Apr 2013