TNB  9MFY13  core  earnings  surged  45.6%  y-o-y  to  close  at  MYR3.3bn. This trumped both our and street estimates, at 85.4% and 89.1% of the respective  full-year  estimates,  on  lower  than  expected  operating expenses. Maintain  BUY, with  a  higher  FV  of MYR10.58  (from  MYR8.98 previously),  based  on  an  unchanged  FY14  P/E  of  13x  following  our earnings revision. TNB remains our top pick within the utilities sector.

- Stellar numbers. Tenaga Nasional (TNB) reported 9MFY13 revenue of MYR27.6bn,  up  by  a  decent  4.2%  y-o-y,  driven  by  higher  electricity sales,  which  rose  4.1%  over  the  period.  Its  operating  expenses, meanwhile, dipped 1.7% y-o-y with fuel expenses closing 17.9% lower y-o-y.  We  attribute  this  to  favorable  coal  costs,  which  registered  an average of USD85 per tonne vis-à-vis 9MFY12’s average of USD108 per tonne. All in, 9MFY13 core earnings surged by 45.6% y-o-y to MYR3.3bn after  stripping  off  the  MYR1.1bn  forex  gains  incurred  on  its  foreign borrowings.

- LNG pricing to be finalized. Management highlighted that the Liquefied Natural Gas (LNG) regasification terminal in Sungai Udang, Melaka was commissioned  on  23  May.  Currently  it  is  receiving  1,200-1,300  million standard cubic feet per day (mmscfd), which is in line with its generation requirement.  Management  is  currently  in  talks  with  Petronas  and  the Energy  Commission  to  firm  up  the  LNG  pricing  formula.  Based  on  our sensitivity analysis, every MYR3 per million metric British Thermal Units (mmbtu) hike in natural gas price would erode TNB’s earnings by some 26.8%-31.1%, assuming tariffs are not similarly revised. 

- Favorable coal costs to remain. Management continues to believe that average coal prices would likely close below USD90 per tonne for FY13 due to the abundant supply. Taking into account the current weakness in coal  prices,  we  are  lowering  our  coal  cost  assumption  from  USD90-USD97  per  tonne  previously  to  USD80  for  FY13,  USD90  for  FY14  and USD92  for  FY15.  Ceteris  paribus,  we  estimate  that  every  USD10  per tonne  hike in TNB’s coal costs would erode  its  core  earnings  by  8.4%-10.3%. Nevertheless, we believe there is a chance that the Government would  allow  tariffs  to  be  adjusted,  albeit  on  a  staggered  basis,  come 2014 to compensate for potential fuel costs hike.

Source: RHB