We are maintaining BUY call on Tenaga (TNB) with FV raised to RM8.98, based on 13x FY14 P/E. Our earnings forecasts are raised by 5.6%-6.4% for the next three FYs on account of the current weakness in coal prices, which we believe will continue to boost its 2HFY13 earnings. Its 1HFY13 core earnings of MYR1.9bn were within both our and consensus’ forecasts.

-  Sturdy electricity sales. TNB reported 1HFY13 revenue of MYR18.0bn, up by 3.8% y-o-y, driven by a 4.6% y-o-y expansion in electricity consumption in the peninsula over the period. Consumption in both the commercial and domestic sectors rose by 5.3% and 7.1% y-o-y respectively.

-  Costs improve as fuel expenses decline. TNB’s 1HFY13 operating expenses declined by a marginal 1.0% y-o-y to MYR15.1bn. We attribute this to the 9.5% y-o-y drop in fuel expenses as the utility company procured coal at prices averaging MYR260 per tonne in 1HFY13 vis-à-vis MYR340 in 1HFY12. This improvement, however, was partly offset by the 30.5% y-o-y jump in staff cost as the group recognized about MYR200m in bonus payout to employees in 2QFY13.

-  Within expectations. All in, the 1HFY13 core earnings surged 28.7% yo-y to MYR1.9bn, making up 52.5% and 52.9% of consensus and our estimates respectively. On a q-o-q basis, the 2QFY13 core earnings totaled MYR880.9m – within our estimate of MYR850m-MYR900m. The company also announced a generous first interim DPS of 10.0 sen, implying a YTD payout ratio of 29.1%.

-  Maintain BUY. With coal prices showing no signs of rebounding as we move into 2HFY13, we are lowering our average coal cost from USD95-USD100 per tonne previously to USD90-USD95. This accordingly lifts our core earnings estimates for the next three FYs by 5.6% to 6.4%. With key factors such as coal prices and forex remaining favourable, we believe TNB is likely to register more strong numbers in 3QFY13. We upgrade our FV to MYR8.98 as we roll forward our valuation to FY14, based on an unchanged 13x P/E.

Source: RHB