Tenaga Nasional - OUTPERFORM

We expect Tenaga Nasional’s (Tenaga) 2Q12 core earnings to surge 138% QoQ to RM438m on the back of a better gas supply, lower coal cost, high hydro power usage and manageable unit demand. Its 1H11 estimated core earnings of RM622m should be within our projection but could be below market (possibly due to distortions caused by one-offs). Tenaga has also gotten its full RM2.0b compensations in 2Q12. Coupled with RM550m in non-cash FOREX gains, 2Q12 reported net profit should be RM2.49b. There is no change to our FY12E core earnings of RM1.21b pending gas supply issue clarity from management. We continue to advise investors to take a 6-9 month view on the stock as FY13E should see improved gas supply and thus, lower fuel cost. We are also banking on meaningful tariff revisions post GE, since neither Tenaga nor the government can continue to bear the heavy fuel subsidy burdens. We reiterate OUTPERFORM recommendation and TP of RM7.31, based on peak 19x Fwd PER* on its average FY12-13E core EPS.

We are expecting 2Q12 core earnings of RM438m (+138% QoQ), which is a significant improvement from last quarter, because of much lower MFO/diesel usage due to 1) 2Q12 gas supply was slightly above 1Q12’s 1050mmscfd; 2) high hydro power usage due to rainy season; 3) coal cost was lower QoQ and 4) 2Q12 unit demand to be lower than 1Q11 due to the festivities period and short Feb-2012. For FY12E, lower demand will result in higher earnings as shortage of gas supply will be met by the more expensive MFO/diesel usage. However, 1H12 core earnings of RM622m would still be a 51% decline YoY as 1H11 had a better gas supply and generation mix. Going forward, we expect Tenaga to see better gas supply of >1100mmscfd if PETRONAS can secure an additional 70mmscfd from the Thailand JDA. 

1H12 core earnings of RM622m should be within our estimate of FY12E core earnings of RM1.21b. However, it may come in below market expectations as the street’s FY12E  core earnings of RM2.34b may be distorted by inclusion of the RM2.0b compensations in core earnings.  We maintain our estimates for now pending clarity on the 2H12 gas supply situation. 

Full RM2.0b compensations are in Tenaga’s books now, which has been imputed in our FY12E reported net profit as a one-off item; note that the RM2.0b is subject to corporate tax. Tenaga has gotten the final payment of RM1.0b from PETRONAS in Feb-12. Inclusive of non-cash FOREX gains of RM550m in 2Q12 (on the back of USD and JPY depreciating against the RM by 6% and 9% QoQ), we expect a  2Q12 reported net profit of RM2.49b. 1H12 reported net profit will be lower at RM2.26b due to FOREX losses in 1Q12. 

Coal cost trending downwards, but Tenaga will maintain FY12E estimate of USD110/mt. We estimate 2Q12 coal cost of USD107/mT vs. 1Q12’s USD110/mT. Management is likely to maintain its and our FY12E assumed cost of USD110/mT. According to management, they do not expect potential Indonesia export tax on coal to affect its FY12E guidance since coal prices have started trending downwards.

5M12 Peninsular unit demand registers growth of 4.4%.  We continue  to assume FY12E Peninsular unit demand of 4.0% as we expect demands to cool-off in 2H12. If unit demand points to higher levels, there will be further downside to our FY12E core earnings of RM1.21b (+233% YoY), which we are maintaining for the moment.  

Source: Kenanga