While TNB’s share
price has rallied in 2012 on expectations of an early General Election,
normalizing gas supply and hopes for PPA renegotiations, we view the drop in
coal prices as a bigger and more reliable catalyst, and this has prompted us to
upgrade the counter to a BUY. Warmer post-winter weather, the absence of floods
in Queensland, slower economic growth in China and the availability of cheap
and abundant shale gas in the US have all contributed to lower coal prices. We
raise our net profit forecasts by over 20% largely on the account of lower coal
prices with our DCF-based FV raised to RM7.68.
Share Price tears
ahead. TNB’s share price has been rallying since the start of 2012, rising
some 13.6% since the end of December to touch its YTD high of RM6.70 in early March
before retracing slightly to current levels. We believe the rally can be
attributed to a recovery in gas supplies from offshore Terengganu, expectations
of an upcoming General Election and PPA renegotiations between the EC and First
Generation IPPs.
Potential 7%
bottom-line boost from capacity payment renegotiations. While awaiting details on the PPA
renegotiations, we estimate that this may lead to an
only 7% boost to TNB’s
bottom-line according to preliminary indications. This is assuming the First
Generation IPPs will have to compete with new generation capacity and among themselves
to secure an extension to the First Generation PPAs, up to 2,500MW of First Generation
PPAs potentially renegotiated and an
indicative 20% reduction in the capacity payments to these renegotiated PPAs
effective immediately.
BUT Coal Price is a
much more compelling factor. Coal prices, especially Australian coal
prices, have been on the retreat since September due to the improved weather in
Australia thus allowing coal to be
mined, transported and exported; warmer weather post the Northern
Hemisphere winter season; and indications of a general economic slowdown in
China. In addition, the increased supply of natural gas in the US from shale has
led to the reduced demand for coal.
Raising earnings and
Upgrading call to BUY. We now incorporate a 2.23% drop in capacity payments
from FY13 onwards and also drop our
effective coal prices to USD110 for FY12 and FY13. These changes in our
assumptions have led us to raise our net profit forecasts by 26% for FY12, 30%
for FY13 and 22% for FY14. Our DCFbased FV is raised to RM7.68. With more than
19% upside to our new FV, we upgrade TNB to a BUY based on longer-term
fundamental factors. In the shorter
term, uncertainties over the election timing may cap TNB’s share price,
although we believe the improved q-o-q results in the upcoming 2QFY12 results
announcement (mid-April) should also boost sentiment as gas supply normalizes
somewhat.
Source: OSK188
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