Tenaga  Nasional's  (TNB)  1QFY13  core  earnings  of  RM1.02bn  beat  our  and consensus'  forecasts,  representing  31.1%  and  31.5%  of  the  respective  full-year estimates,  buoyed  by  favourable  coal  prices.  As  we  are  revamping  our  model following  a  reallocation  of  our  internal  resources,  we  upgrade  our  earnings forecasts by 0.1%-9.7% for the next three FYs. Maintain BUY, with our FV revised to RM8.41, pegged at a lower FY13 PER of 13x vs 15x previously.   

A sterling start. TNB's 1QFY13 revenue rose more than 5.0% y-o-y to RM9.13bn, driven mainly  by  higher  consumption  in  the  commercial  and  domestic  sectors.  Meanwhile, operating  expenses  shrank  5.0%  y-o-y  and  8.9%  q-o-q  due  to  favourable  coal  prices averaging RM259 per tonne during the quarter as international prices of the commodity in USD  terms  continued  to  slip  due  to  oversupply  concerns.  This  gave  rise  to  more  than RM500.2m in cost savings y-o-y and RM326.0m q-o-q vs 4QFY12. Overall, TNB's 1QFY13 core earnings of RM1.02bn were more than 100% higher y-o-y and up by a commendable 9.7% q-o-q even though 1Q was a seasonally weaker quarter.
 
Other  highlights.  At  an  analyst  briefing  following  the  release  of  its  results,  TNB's management  said  it  still  believes  that  coal  prices  are  likely  to  hover  between  the  current level and USD100 per tonne for the rest of 2013. This jives with our coal price assumption of USD95 per tonne for FY13 and USD100 for both FY14 and FY15. Meanwhile, TNB has submitted its bid for a 1,000MW coal-fired power plant scheduled for commissioning in Oct 2017 and intends to participate in the tender for the other 2x1000MW coal-fired plant.

Maintain  BUY. Following  an  internal  coverage  revamp,  we  have  revisited  our model and revised some assumptions. This leads to upgrades in our core earnings forecasts by 9.7% for  FY13,  5.7%  for  FY14  and  0.1%  for  FY15.  As  the  key  factors  of  coal prices  and weakening  USD  continue  to  favour  TNB,  we  believe  it  would  register  strong  results  in 2QFY13 as well. That said, we are lowering our FV to RM8.41 as we tweak our FY13 PER to 13x to place it in line with its historical average, as well as incorporate potential general election risks. Given the substantial upside of more than 20%, we maintain our BUY call.

Higher  electricity  sales. TNB reported 1QFY13 revenue of RM9,130.8m, down by 2.2% q-o-q  owing  to  seasonality,  but  up  by  over  5.0%  y-o-y  driven  both  by  higher  electricity consumption  as  well  as  higher  revenue  per  unit  sold  in  the  Peninsular.  In  particular, consumption in both the commercial and domestic sectors witnessed a sturdy expansion of 5.0%  and  6.1%  y-o-y  respectively  in  1QFY13.  This  positive  impact  further  spilled  over  to higher revenue per unit sold, given that TNB's commercial customers typically pay higher tariffs,  and hence  helped  to  amplify  topline  growth.  Going  forward,  management  believes that higher domestic demand as well as increased capital spending would continue to spur power consumption. Its FY13 target demand growth of 3.5% is in line with our estimates.

Favourable  coal  prices.  Meanwhile,  the  group's  operating  expenses  declined  by  a significant 5.0% y-o-y and 8.9% q-o-q. We attribute this to favourable coal costs during the quarter,  at  an  average  of  RM259/mt  (-24.4%  y-o-y;  -11.1%  q-o-q)  as  international  coal prices  continued  its  downtrend  on  oversupply  fears,  coupled  with  the  weaker  greenback against the RM during the period. These two factors alone contributed to costs savings of over  RM500.2m  on  a  y-o-y  basis  and  RM326.0m  against  4QFY12.  As  a  result,  TNB's 1QFY13 costs per unit improved 14.9% y-o-y and 6.4% q-o-q to 28.6 sen.

Strong  start  to  FY13.  Consequently,  TNB's  EBITDA  improved  35.3%  y-o-y  to RM2,829.2m, with a corresponding 700 bps hike in its margin to 31.0%. All in, 1QFY13 net profit  surged  by  over  100%  y-o-y  and  40.4%  q-o-q  to  RM1,415.5m.  Stripping  off  the RM399.8m forex gains on its foreign borrowings due to the weaker USD and JPY against the  RM,  TNB  posted  core  earnings  of  RM1,015.7m,  up  by  more  than  100%  y-o-y  and  a commendable 9.7% q-o-q despite 1Q being a weaker quarter seasonally.

New  accounting  standard  dragged  down  NTA/share.  On  a  side  note,  we  noticed  that TNB  registered  a  liability  of  RM3,223.9m  as  employee  benefit  reserve  during  the  quarter following its adoption of MFRS119. Under the new accounting standard, the present value of  its  retirement  benefits  as  well  as  post-retirement  medical  coverage  would  have  to  be recognized  upfront  under  other  comprehensive  income,  with  a  revaluation  taking  place every  three  years.  While  this  dragged  down  its  NTA  per  share  by  some  RM0.58,  or  by 9.6%, we are fairly neutral to slightly positive on this as it is more reflective of TNB's future liabilities  based  on  actuarial  assumptions.  And  as  these  recognitions  would  bypass  its income statement, they have minimal impact on our earnings forecasts.    

Melaka  regasification  terminal  by  mid-2013.  During  its analysts' briefing, management highlighted that the Liquefied Natural Gas (LNG) regasification terminal in Sungai Udang, Melaka would likely  be commissioned by the middle of this year. While sources indicated that PETRONAS would likely only sell the LNG produced at market prices, we continue to believe  that  there  is  a possibility  of  the  Government stepping  in by  compensating  TNB in order  to  cover  for  the  additional  fuel  costs  incurred.  This,  in  our  view,  is  the  most  viable option at this juncture for both TNB and the existing Government until a proper fuel costs pass  through  formula  is  in  place,  which  we  believe  would  only  be  likely  after  the  13th General Election.
 
Coal  prices  to  remain  stable.  Management  continues  to  believe  that  coal  prices  would likely hover between the current level of around USD90/mt and USD100/mt for the rest of the  year  due  to  the  abundant  supply.  This  jives  with  our  assumption  of  an  average  coal cost of USD95/mt for FY13 and USD100/mt for both FY14 and FY15. TNB current sources 70% of its coal from Indonesia and the remainder from Australia and South Africa.

Bidding  for  3,000MW  capacity  expansion.  On  its  ongoing  capacity  expansion,  we understand  that  works  at  its  proposed  Janamanjung  expansion  as  well  as  its  new  hydro plants in Hulu Terengganu and Ulu Jerai are largely on track. Management also indicated that TNB has placed a bid for a 1,000MW coal-fired power plant scheduled for commission in Oct 2017 and that it would likely to also participate in the tender for another 2x1000MW coal-fired plant, which is targeted to be operational by 1Q2019. Although the fact that TNB is  bidding  for  these  plants  is  not  exactly  new,  we  are  glad  to  know  that  the  group  is proactively looking to expand its own generation capacity after having recently won the bid for the RM2.5bn 2x535MW gas-fired plant in Prai, Pulau Pinang in Oct 2012. Management reaffirmed  TNB's  capex  allocation  of  RM9.7bn  over  the  next  five  years  to  construct  new power plants. 

First  generation  PPAs  to  be  finalized.  On  the  ongoing  renewal  of  the  first  generation power  purchase  agreements  (PPAs),  TNB  confirmed  that  letters  of  invitation  have  been issued  by  the  Energy  Commission  to  1Malaysia  Development  Bhd  (1MDB)'s Genting Sanyen Power, Malakoff's Segari Energy Ventures as well as its own TNB Pasir Gudang Energy. Negotiations would likely commence soon and we believe it is just a matter of time for the official finalization of the agreements.  

Maintain  BUY.  Following  our internal coverage  restructuring,  we  are  revamping  our  TNB model  and  revisiting  some  of  our  core  assumptions.  Correspondingly,  we  are  upgrading our core earnings forecasts by 9.7% for FY13, 5.7% for FY14 and 0.1% for FY15. With the key  factors  of  coal  prices  and  forex  remaining  in  TNB's  favour  -  coal  prices  at approximately  USD90/mt  and  the  USD  at  RM3.04  currently  -  we  believe  the  company would  likely  register  another  strong  set  of  results  in  2QFY13.  Having  said  that,  we  are lowering  our  FV  from  RM8.90  to  RM8.41  as  we  tweak  our  FY13  PER  to  13x  (from  15x previously) to be in line with its historical average as well as  taking into account potential election risks. Nonetheless, given the substantial upside of over 20%, we are maintaining our BUY call.

Source: OSK