Tenaga Nasional - 2QFY12 rebound from fuel relief and more gas supply BUY

- We reiterate our BUY call on Tenaga Nasional (Tenaga), with an unchanged DCF-derived fair value of RM7.35/share, which implies a CY12F PE of 13x and a P/BV of 1.3x. 

- Excluding forex gains and the RM2bil fuel relief compensation arising from the use of additional distillates and oil, Tenaga’s 1HFY11 core net profit of RM864mil came in above expectations. On an annualised basis, this was 18% above our FY12F core net profit of RM1,466mil (excluding fuel relief). We are unable to provide a meaningful comparison with  street estimate of RM2,242mil (high of RM3.8bil and low of RM2.2bil), which is skewed by different assumptions, with some likely not including the fuel relief. 

- But given gas supply variations until August this year, we maintain Tenaga’s FY12F-FY14F net profits which incorporate natural gas supply assumption of 1,150mmscfd in FY12F and 1,350mmscfd for FY13F-FY14F. We also maintain our coal cost assumption of US$110/tonne (vs US$100/tonne currently) and electricity demand growth of 4% for FY12F-FY14F as guided by management.

- Tenaga’s 2QFY12 core net profit surged by 2x to RM670mil largely from a 67% QoQ contraction in the consumption of high cost distillates and medium fuel oil. This came from:- (1) a 2% QoQ seasonal decline in Peninsular electricity demand which reduced distillate and oil consumption, (2) a 6% QoQ increase in natural gas supply to 1,100mmscfd, and (3) a 24% QoQ increase in hydro-power generation due to good seasonal rainfall. 

- As we had earlier highlighted, provided in our forecast assumptions and now confirmed by management, Tenaga has received a letter from the government that stipulates that the additional fuel cost borne by the national utility will continue to be equally shared between Tenaga, Petronas and the government from 1 November 2011 until 1 September 2012 – by then the supply of 200mmscfd of gas will commence from the Melacca regassification facility to the power sector.

- We remain positive on Tenaga due to:-

(1) Falling global coal and US-based natural gas prices, which will positively transform the company’s cost structure. A US$10/tonne decrease in coal costs will raise FY13F net profit by 14%.

(2) Likelihood that Petronas and the government will continue to bear the higher liquefied natural gas costs from the Melacca regassification plant in the near term (due to political factors), which could mitigate further fuel cost pressures. 

(3) New plant-ups to replace the first generation independent power producers, with expiring power purchase agreements likely to reduce capacity payments. In an open tender environment with Tenaga as the bidder and sole offtaker, fixed power purchase costs are likely to decline.

- The stock currently trades at a P/BV of 1.2x, at the lower range of 1x-2.6x over the past 5 years. Earnings-wise, Tenaga offers an attractive CY12F PE of 11x, compared with the stock’s three-year average band of 10x-16x.  

Source: AmeSecurities