Tenaga Nasional - Boost from falling coal price BUY

-  We reiterate our BUY call on Tenaga Nasional, with an unchanged DCF-derived fair value of RM7.35/share, which implies a CY12F PE of 13x and a P/BV of 1.1x.

-  Newcastle coal spot prices has fallen by 26% since the beginning of the year to US$84/tonne (for 6,700 caloric value) due to high exports of US coal and surprisingly, high inventories in China (See Chart 8). 

-  In the US, low natural gas prices have cut domestic demand for thermal coal, resulting in suppliers selling more overseas. In China, power consumption growth has slowed down, resulting in excess coal inventories. 

-  There are reports that some coal producers in the US, Indonesia and Russia may begin to cut back on production to stem the decline in coal prices. But the impact is likely to be felt only over the next few months, or towards the winter season at the end of the year.

-  The plunge in coal costs, which account for 45% of Tenaga’s 1HFY12 fuel costs, is one of group’s key earnings drivers. The other major factor is the ongoing negotiations to rebalance tariff rates between electricity and natural gas.

-  As Tenaga’s FY13F net profit will rise by 14% for every US$10/tonne decline in coal cost, we estimate that a decline in our coal cost assumption to US$80/tonne will result in a 41% boost to the group’s earnings.

-  But we maintain Tenaga’s FY12F-FY14F net profits for now, pending the government’s decision on the price of natural gas and electricity tariffs with the commencement of the Lekas regassification terminal in Malacca scheduled in September this year. 

-  For now, our FY12F-FY14F coal cost assumption is maintained at US$110/tonne – 37% above the estimated all-in blended coal cost of US$80/tonne currently.

-  We remain positive on Tenaga due to:-  (1)Stabilising natural gas supply from the Lekas regassification plant in Malacca by September this year will provide clearer earnings visibility, (2) Falling global coal prices will positively transform the company’s cost structure, (3) Pending the upcoming elections, there is a possibility that Petronas and the government will continue to bear the higher liquefied natural gas costs from the Malacca regassification plant, which could mitigate further fuel cost pressures, and (4) New power purchase agreements in an open tender environment, with Tenaga as the bidder and sole off-taker, will further drive its fixed power purchase costs lower.

-  The stock currently trades at a P/BV of 1x, 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