Tenaga Nasional Bhd’s (TNB) 9MFY12 net profit of RM3.2bn was inflated by the RM2.8bn compensation it received for higher fuel cost due to gas supply shortage. Its core net profit was below our estimate, after stripping out the compensation and forex loss. The utility company’s 3QFY12 bottomline was hit by increased use of coal and oil & distillates. As we expect the annual demand for power to grow 4%-5% and the gas shortage to continue into the next quarter, TNB’s 4Q does not look too promising. We are cutting our FY12 earnings forecast by 17%, which gives us a new FV of RM7.57 (previously RM7.68), based on DCF. However, TNB still justifies our BUY call given that its FY13 outlook appears more upbeat and a possible re-rating post General Election.
Below expectations. TNB’s 3QFY12 net profit was again inflated by the compensation it received from the Government and Petronas (RM777.8m less RM194.5m tax) as part of the fuel cost sharing compensation from the Nov 2011 to May 2012 period. Excluding a forex loss, TNB’s core net profit came in at RM576m and RM1406m (-13.6% q-o-q, +14.5% y-o-y) for 3QFY12 and 9MFY12 respectively. The 3Q net profit of RM576m was way below our estimates while cumulative 9-month earnings only met 57% of our full-year forecast.
Using more alternative fuels to feed demand. Despite the revenue growth of 6.1% q-o-q, TNB’s profit margin shrank, mainly due to the higher utilization of coal and oil & distillates to meet the higher demand for electricity in 3Q. On a q-o-q basis, the utilization of coal and oil & distillates increased by 10% and >100% respectively, pushing up the utility company’s generation costs. That said, the decline in coal price as well as the kicking in of the fuel cost sharing mechanism helped cushion the impact heightening generation costs.
Demand continues to rise. The y-o-y demand growth of 4.2% was mainly driven by a 5.3% y-o-y demand growth in the commercial sector while q-o-q demand continued to trend higher by 4.4% in 3Q (vs 4.3% growth in 2Q). Management guided that with the projected steady GDP growth of 4.0%-5.0% for 2012 and strong IPI numbers in May 2012, electricity demand growth of 4.0%-5.0% for FY12 is achievable. Having said that, we are maintaining our demand growth forecast of 4.0% and 3.5% for FY12 and FY13 respectively.
May not see significant improvement in 4Q. While we believe TNB may continue to face a gas shortage in 4QFY12 as the regasification plant in Melaka will only commence operation in September 2012, it may still have to use more coal and oil & distillates, which cost more than gas. Although management has guided that coal price is now trending down, we still think that it may not significantly bring down generation cost. Thus we do not foresee any significant improvement for TNB in its final quarter of FY12. As such, we are trimming our FY12 earnings forecast by 17% to RM2072m while maintaining our FY13 numbers.
FY13 looks brighter. We believe TNB’s FY13 outlook should improve as the regasification terminal in Melaka will commence operation in September while the renegotiation of the 1st Gen IPPs as well as declining coal price may potentially mitigate the higher generation cost. Also, TNB has been assured that it will not have to bear the brunt of higher gas prices when it starts importing liquefied natural gas (LNG) in September, which seems to indicate that even if gas prices changed, the impact on TNB would be neutral. That said, we prefer not to revise our FY13 earnings numbers at this juncture.
Reiterate BUY, but with a lower FV. TNB still justifies our BUY recommendation in view of the positive developments, which will help it mitigate rising operating costs and boost its bottomline. Also, a tariff revision is likely to be in place post General Election which may lead to a re-rating of TNB. Upon revising our FY12 earnings estimate, the stock’s fair value goes down slightly to RM7.57 (from RM7.68), based on our DCF model, with WACC of 9.5% and a terminal growth rate of 3.6%.
Source: OSK
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