Tenaga Nasional Bhd
(Sept 29, RM12.28)
Maintain “buy” with target price of RM14.55: The latest daily electricity generation report suggests that coal-fired power plant utilisation has surged to 86% from 72% in the third quarter of financial year 2014 (3QFY14). Consequently, we expect coal generation mix to recover to about 45% (3QFY14: 38%). Note that power generation mix from coal was above 40% before the unplanned outages of Tanjung Bin and Jimah. FY13 generation mix from coal was 44%.

The Newcastle benchmark coal prices remain below US$70 (RM228) per tonne. (TNB’s coal benchmark price embedded in January 2014 tariff is US$87.50 per tonne.)

We estimate daily gas delivery for the power sector fell by some 13% q-o-q in 4Q14 to approximately 1,227 mmscfd (3QFY14: 1,405 mmscfd). This is unsurprising as coal-fired IPPs’ availability factor returns to normalcy in the absence of further unplanned outages. More importantly, the lower gas delivery in 4QFY14 bodes well for TNB as it suggests a reduction in imported liquefied natural gas (LNG), which is 3 times more expensive than piped gas of RM15.20/mmbtu.  Blended gas price for nine months (9MFY14) is estimated at RM23.30/mmbtu (9MFY13: RM15.60/mmbtu).

Consequently, PM’s gas generation cost rose from 12.5 sen/kwh (3QFY13) to 21.1 sen/kwh (3QFY14).

Separately, it was reported that Tokyo Gas Co is teaming up with Korea Gas Corp on gas imports in order to drive down LNG prices. The companies will begin discussions on supplying each other with LNG, cooperating on procurement of the fuel, and jointly investing in upstream projects. The aim is to erode the so-called Asian premium paid by gas buyers in the region, where the fuel must be shipped by tankers in liquid form and contracts are linked to the price of oil.

This is positive for the power sector in the long run, as it points towards easing gas cost. That said, near-term gas cost is expected to rise with the inclusion of LNG since June 13.

We expect TNB to post a 13.6% core net profit growth into FY15. This factors in a 7% revenue growth to lift FY15F core net profit as a result of: i) 3.5% unit sales growth, and ii) full-year impact of an average 15% tariff hike that took effect in Jan 14.

In the absence of a near-term tariff review, we expect TNB to benefit from lower coal prices. Our FY15 earnings forecast is 4% ahead of consensus. We have factored in a lower coal cost of US$79 per tonne in FY15F. Management remains in talks with the regulators regarding the best mode of compensation for higher generation cost incurred by TNB in the first half (1HFY14) due to lower coal power plant utilisation and high LNG costs. We estimate cost recovery from January to June 2014 to amount to about RM458 million.

Maintain “buy” with a discounted cash flow-based target price of RM14.55. This implies 14.6 times FY15F price-earnings ratio (PER) and 7 times enterprise value/earnings before interest, taxes, depreciation and amortisation. We believe that TNB remains in the early stages of its upwards earnings revision cycle. Normalisation of its earnings will prompt the market to re-rate TNB back to the 14-16 times PER multiple recorded prior to gas supply disruption. Current implied FY15F PER of 12.3 times is undemanding (parity to its five-year average PER).

With the end to gas shortage problems in FY11 to FY13, normalisation of coal plant utilization and full-year effect of the 15% average tariff hike on FY15 earnings, TNB’s free cash flows (FCF) are expected to normalise towards RM3 billion to RM3.6 billion levels (FY13: RM1.1 billion). Thus, with projected FCF yields of 4% going forward, we believe TNB can potentially distribute higher dividends than the current projection of only 2.4%.

Catalysts for the stock include: i) strong economic growth that will drive electricity demand, ii) base tariff hike scheduled once every three years, and iii) winning new power plant projects. Recall TNB recently entered into a MoU to jointly build a 1,320MW coal-fired power plant in Bangladesh. — UOB KayHian, Sept 29

This article first appeared in The Edge Financial Daily, on September 30, 2014.